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:: Profit & Loss

Profit

The maximum profit at expiry is the premium received.

 

Loss

The maximum loss at expiry is the strike price less the premium received.

 

Break Even

The break even point at expiry is the strike price less the premium paid.
 

Naked Puts
 
There are several reasons why you might write naked puts. And while your use of either will be determined by your view of the market, both stem from the fact that the writer of a naked put will only be assigned its underlying shares if the share price falls below the option's strike price. In that case, as the writer of the put, you will have to purchase 100 shares of the stock. On the other hand, if the share price stays above the strike price, you keep the entire premium as profit.
 
:: Income
The first reason for writing naked puts is income - as with covered calls, if the option expires worthless, you keep the entire premium as profit. Given that you need the share price to be above the strike price for this to happen, you would do this if your view of the market were moderately bullish.  
 
:: Trading Condition
Stock Cisco
Price $17.64
Outlook Short term moderately bullish.
:: Alert Example
Action Sell 10 Puts
Strike $17.50
Premium $0.45
Total $450
   
:: Profit Scenario

If Cisco continues trading above $17.50 until expiration, the puts you sold won't be exercised and you keep the premium. In that case, you have only paid one lot of brokerage (on the sale of the put). This is one significant attraction of naked puts that should be considered, particularly for those whose profile doesn't allow many contracts to be traded at a time. In terms of transaction costs, an unassigned naked put is the cheapest trade to execute. 

 
:: Protection
As with the Covered Call, the Naked Put provides you with no downside protection should there be a dramatic fall in the price of the underlying. If you don't close out the position once it is in-the-money, the option will be exercised and you will be required to buy the stock at the strike price.
 
:: Discounted Stock
This brings us to the second reason you would write naked puts, which is to actually buy the stock, hopefully at a discount. In that is your intention, you would want the stock price to fall and you would want to be exercised.
 
:: Trading Condition
Stock Microsoft
Price $28.00
Outlook Short term bearish, median term bullish.
:: Alert Example
Action Sell 5 Puts
Strike $27.50
Premium $0.55
Total $250
   
:: Purchase Scenario
When the results are released the stock price does drop slightly to $27.30. Your puts are now in-the-money and you are exercised, which means you have to buy 500 shares of Microsoft stock at $27.50. Your net cost, however, is actually $27.00 a share ($27.50 strike - $0.50 premium), a saving of $0.30 on the current share price.