A naked put (or an uncovered put) is a put option issued by an option writer who does not hold the underlying asset.
Naked puts are used in the stock markets by investors seeking to build up their holdings in the underlying stock – but only if the stock’s price falls to the price they are willing to pay.
If the stock price does not fall sufficiently, the investor does not buy any shares, but makes a profit by holding on to the option premium – the price the buyers of the put options paid for the options.
In 1993 Warren Buffett used a naked put strategy to purchase shares in Coca-Cola. He determined that he was willing to pay $35 per share for the stock, which was trading at about $39. His method involved writing 5 million put options at a strike price of $35.
Warren Buffett’s Naked Put Option Strategy to Invest in Coca-Cola
If Coke stock fell below $35, the option takers would “put” their shares to him, Buffett would be forced to buy at $35. This was perfectly fine for Buffett because he wanted to buy at that price anyway. If Coke rose instead Buffett would be happy enough, he collected a $1.50 option premium ($7.5 million) even if the stock never fell to his target. Being a strict value investor he would not have been interested in buying Coke at more than $35 so therefore the fact that it went up without him buying it was perfectly fine by him.