uncovered put
Uncovered Put: selling someone the right to sell you a stock at a fixed price, without setting aside the cash to buy it if they choose to.
In plain English
Think of a landlord in Lekki who promises a tenant, if things go wrong, I will buy back your generator for ₦150,000 any time this year, and pockets a small fee for making that promise. He does not actually put ₦150,000 aside. He is betting that the tenant will never need to cash in that promise, and if he is wrong, he has to find the money fast, often at the worst possible moment.
That is exactly what an uncovered put is in the stock market. You sell a put option, which gives someone else the right to sell you a stock at an agreed price, called the strike price, before a certain date. In exchange, they pay you a small fee called a premium. Uncovered, or naked, means you have not set aside the cash to actually buy the stock if they decide to sell it to you.
If the stock stays calm or rises, you simply keep the premium and life is sweet. But if the stock crashes, the other person will exercise their right, hand you the shares, and demand full payment at the old, higher strike price, even though the shares are now worth far less on the open market.
Someone trading MTN Nigeria shares on the NGX might sell a put believing the price will hold steady, collecting a premium of a few thousand naira per contract. A trader in London doing the same thing on Barclays shares through a UK brokerage faces the identical risk, just in pounds instead of naira. The market does not care which country you are calling from when it turns against you.
This is why brokers usually demand that you hold enough margin, a kind of security deposit, before letting you sell uncovered puts. It is not a strategy for someone testing the waters. It suits traders who genuinely have the funds ready and who have thought through the worst case, more than the best one.
You sell an uncovered put on a stock trading at ₦500, with a strike price of ₦480, and collect a premium of ₦15 per share. If the stock falls to ₦300, the buyer exercises the put, and you must buy shares worth ₦300 for ₦480 each, losing far more than the ₦15 premium you earned.
Questions people ask
Why is it called uncovered or naked?
Because you have not covered your side of the bet with cash or shares set aside. A covered version would have the money ready and waiting, so there is no scramble if the option is exercised.
Is an uncovered put riskier than just buying a stock?
In many ways yes, because losses can happen quickly and you may be forced to buy shares at a price well above what they are currently worth, sometimes with borrowed money you did not plan to use.
Can ordinary retail investors in Nigeria sell uncovered puts?
It depends on the broker and the platform, since most require a certain account size and margin approval before allowing this kind of trade, precisely because the potential losses can be large.
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