Naked Put

Quick answer: Naked Put is a short put held on margin rather than against reserved cash: the payoff is identical to a cash-secured put, but because only margin is posted, an adverse move can trigger mark-to-market calls and a forced liquidation the trader cannot fund.

In simple words

You promise to buy something at a set price and are paid a fee, but this time you have not put the full purchase money aside — you have only posted a deposit. As long as the price holds, the deposit is enough and you keep the fee. If the price falls, the exchange asks for more deposit, again and again, and if you cannot add it your position is closed at the worst possible moment. Same promise as the cash-secured version, but without the money ready, the market — not you — decides when you are done.

Payoff diagram

Professional explanation

Identical payoff, different collateral

A naked put and a cash-secured put are the same option: one short put at the same strike, the same premium, the same profit-and-loss line at expiry. There is no payoff difference whatsoever. The entire distinction is collateral. The cash-secured put holds the full strike value in cash, so assignment is a purchase you have already funded. The naked put posts only the exchange-required margin, a fraction of the strike value, and treats the freed-up capital as available. That single choice changes almost nothing at expiry and almost everything about how the position behaves while it is open.

SPAN and exposure margin, recomputed live

A short put attracts SPAN margin plus an exposure margin. SPAN is computed from a set of scenario shocks to price and volatility, so the requirement is not fixed — it is recalculated through the day as the underlying moves and as implied volatility changes. When the market falls and volatility jumps together, both inputs push the requirement up at once. A position that was comfortably margined in the morning can require substantially more by afternoon, without the trader doing anything. This is the mechanism people underestimate: the margin is a moving number, and it moves against you exactly when the position does.

Mark-to-market and the margin call

Positions are marked to market continuously. As a naked put moves against you, unrealised loss is debited and the margin requirement rises, so your available margin is squeezed from both sides. If it falls short, the broker issues a margin call; if it is not met promptly, the broker is entitled to square off the position. The danger is that this forced exit happens at a market price of the broker's choosing, in a falling, illiquid market, locking in a loss the trader might have ridden through had the cash been there. The cash-secured version never faces this, because the money is already set aside.

Forced liquidation is the real difference

The worst case of a naked put is not merely the same large loss as the cash-secured put — it is that the trader may be forced out before that loss is even realised, at a point not of their choosing. A gap down through the strike can spike the margin requirement past what the account holds, triggering an automatic square-off. The trader wanted to buy the underlying at the strike; instead they are closed out at a loss and never get the position they intended. The naked put converts a funding decision into a survival question during stress.

Why it is undefined risk

Like the cash-secured put, the naked put has no long leg to cap its loss, so the maximum loss is bounded only by the underlying reaching zero — large and finite, not unlimited. The margin posted does not cap the loss; it only determines how much room the account has before a call. On the illustrative legs the worst case at expiry is the same as the cash-secured put. The margin framing simply removes the buffer of set-aside cash, so the same risk is carried with a thinner cushion and a live threat of being closed out.

Construction

1. Choose an underlying and a put strike below the current price at which you are willing to be short the put.
2. Confirm the SPAN plus exposure margin the position will require, and that the account can withstand that requirement rising on an adverse move.
3. Sell one put, collecting the premium, with only margin posted rather than the full strike value.
4. Monitor the position and available margin continuously; be prepared to add margin or accept a forced square-off if the underlying falls.

Market outlook

A trader may study a naked put when they hold a bullish-to-neutral view, want the premium, and prefer not to tie up the full strike value in cash — accepting the margin exposure that choice brings. The view that invalidates it is any expectation of a sharp fall or a volatility spike, because either can drive the margin requirement up faster than the account can absorb and force an exit at the worst time. It also assumes the trader can monitor and fund the position through stress; without that, the margin efficiency becomes a liability rather than an advantage.

Risk profile

A naked put carries undefined risk. There is no long leg to cap the loss, so the maximum loss is bounded only by the underlying reaching zero — a large but finite figure, identical at expiry to a cash-secured put on the same strike. What the margin framing adds is not more expiry risk but path risk: the SPAN requirement rises as the underlying falls and volatility climbs, mark-to-market losses squeeze available margin, and a shortfall can trigger a forced square-off at a price the trader does not choose. The posted margin does not cap the loss; it only sets how far the market can move before the account is called.

Reward profile

The reward is capped at the premium collected, exactly as for a cash-secured put — on the illustrative legs, 211 per unit or ₹15,825 per lot, kept if the underlying settles at or above the strike. Running the position on margin does not increase the reward at all; it only reduces the capital tied up, which can raise the return on capital while leaving the rupee reward unchanged. That higher return on capital is the entire attraction, and it is bought precisely with the margin-call and liquidation risk described in the risk profile.

Margin requirement

A naked put attracts SPAN plus exposure margin — a fraction of the strike value, not the whole of it, which is the point of running it naked. That requirement is recomputed intraday from scenario shocks to price and volatility, so it rises as the underlying falls and as implied volatility climbs. A mark-to-market shortfall triggers a margin call, and an unmet call entitles the broker to square off the position. NSE and brokers revise these rules periodically; the requirement should be treated as a moving number, not a fixed cost.

Greeks exposure

The sign on each Greek above is computed, not asserted: it is the net exposure of the illustrative legs at spot 24,000 with 30 days to expiry, priced with Black–Scholes using each leg's implied volatility calibrated from its own quoted premium. A sign can flip as the underlying moves — the panels below show where. See Methodology.

Volatility impact

A naked put is short one option and short volatility, and here the volatility effect is amplified by margin. When implied volatility rises, the put marks against you and the SPAN requirement — which is built from volatility shocks — increases at the same time, so a volatility spike squeezes both your P&L and your available margin at once. Because such spikes usually accompany falling markets, the naked put tends to meet its worst price and its worst margin demand together. Falling volatility relieves both. This coupling of volatility to the margin requirement is the key difference from an otherwise identical cash-secured put.

Time decay

Time decay works for the position: the sold put loses time value daily and that decay accelerates into expiry, so a naked put held through quiet conditions earns theta at an increasing rate while the underlying stays above the strike. The margin framing does not change theta itself, but it does change the stakes of waiting — the position must survive every day's mark-to-market and margin recomputation to reach the decay it is counting on. Theta is the reward; the path is the risk, and on margin the path can end the trade before the reward arrives.

Practical examples

Lot sizes used above (NIFTY 75, BANKNIFTY 30) are those in force at the time of writing; NSE revises them periodically. Figures exclude brokerage, STT, exchange charges, stamp duty and GST, all of which materially affect small spreads.

Common mistakes

• Treating the freed-up capital as spare and deploying it elsewhere, so there is nothing left to meet a margin call when the underlying falls.
• Assuming the margin requirement is fixed, when SPAN is recomputed intraday and rises as price falls and volatility climbs.
• Ignoring that a gap down can spike the requirement past the account balance and trigger a forced square-off before expiry.
• Selling puts on more lots than the account could fund through a stress move, so a single adverse day closes the whole book.
• Confusing the naked put's smaller margin with smaller risk — the maximum loss is the same large finite figure as a cash-secured put.
• Overlooking that a volatility spike hits P&L and margin together, so the worst price and the biggest call tend to arrive at once.

Advantages & disadvantages

Professional usage

Professionals routinely sell puts on margin as part of a volatility-premium book, and margin efficiency is central to how they size and finance it. The difference is infrastructure: desks run real-time margin monitoring, stress the book against large gaps, hold liquidity reserves against calls, and diversify across underlyings so one shock does not force the whole position out. A retail trader has the same margin mechanics but rarely the same reserves or diversification, so the identical structure carries a sharper path risk. The concept scales down; the safety margin around it usually does not.

Frequently asked questions

Voice search & related questions

Natural-language questions people ask about the Naked Put.

Sources & references

• NSE — Equity Derivatives
• SEBI — Study of profit and loss of individual traders in equity F&O
• McMillan, Options as a Strategic Investment

Last reviewed 9 July 2026. Educational content only — not investment advice.