Option Strategies: An Analysis of Naked Put Writing

Writing naked put options is a strategy employed either as a speculation to capture premium income, or as a method of placing a limit order to buy the underlying at the strike price in return for premium received. Using a Monte Carlo simulation, twenty thousand equity prices are generated under known volatility and return parameters. A binomial tree is constructed using the same volatility and return parameters. Put options on these 'equities' are valued with the binomial methodology. The performance of various put writing strategies is evaluated on a risk-adjusted basis. Evidence presented suggests that the judicious use of put options may enhance returns during portfolio construction.