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A Fortune in Selling Naked Call Options (w/Martingale)
- Thread starter jones247
- Start date
Quote from FullyArticulate:
Selling calls in a down market looks like an easy way to make money, just like selling puts in an up market.
Whether price increases are as common as price decreases is left as an exercise to you. At first guess, I'd say the odds are pretty even.
1) Acquisition
2) FDA approval
3) Surprise fed rate cut
4) Scare in base commodity (e.g. oil scare when you're trading VLO or XOM)
5) Earnings surprise or earnings preannouncement
Those are all reasons that happen *all the time* which cause prices to spike.
That's just equities. Futures have numerous reasons why the price might spike outrageous amounts in a few days. (Just look at any grain, bond, or currency going back the last 10 years)
This strategy tends to have frequent small wins and occasional big losses. You also need to develop a hedging strategy. Even if you immediately cover your call if it becomes ITM, your losses will not be small.
A variety of hedge funds make good money with these option selling strategies, some even with very small drawdowns (LJM, for example). But, they're doing MUCH more than simply selling a few calls and waiting.
Thats why you only sell them naked after a huge up day. The premiums get way out of wack and you can make quick money just holding for a couple of days.
John
Quote from robbie380:
jones...what is your point with this thread? what is stopping you from trading this strategy? if you think it is excellent then go for it.
Thanks for the nudge robbie380; I have tried this strategy & do intend on continually testing and improving it. Becasue of my desire to improve it, I have chosen to create this thread. An excellent improvent idea posted by chrismontez is to turn the naked call into a synthetic covered call by buying the stock if the strike price is reached. Preferrably, I would buy a DITM call with a 2 month expiration instead of the stock. Nonetheless, it was a creative way of managing the risk.
Actually, the more I consider a short strangle, the more appealing it is to me. I have tested short strangles, and as I stated earlier, this past monthly option period (Dec - Jan) was brutal for me. However, if I had sold shorts about 2 std dev ITM, with a one time martingale double-up for the leg that is in my favor and going long on a DITM option on the other leg that moved against me by the set amount, I would have profited quite well.
If this is a bad strategy, then I am willing to accept that fate; however, hopefully we can all share in the potential benefit of this strategy by including improvments that will make this a more powerful and safe strategy. I recognize that there are many who refuse to share their strategies and ideas and only look to receive from others; however, I believe in the principle of giving to receive. By sharing and offering one will be blessed by receiving in-kind from others. I think this forum would be most healthy and beneficial if everyone had a willingness to completely share and seek to help one another. Perhaps I'm too idealistic, but aren't we all in this together. The successes of today were built upon the lessons learned and discoveries of yesterday. Furthermore, may tomorrow's enhancements bear fruit from today's achievements. This is the cycle, whether in medicine or finance or technology...
Walt
Quote from forex-forex:
Selling out-of-the-money (or ATM) premium. It's not a "bearish" move.
Exactly my point. The OP is doing this by justifying selling calls after a upmove. Essentially, he is playing the reversal. If the OP was so sure about his forecast, why wouldn't he just short? By selling calls he is neutral to bearish. A mixed bias. If the bias is clear, there are better ways to make money. Selling calls after an upmove is a rangebound bet with implied bias to the downside. A not 'bearish' move doesn't automatically make it bullish.
Quote from jficquette:
Thats why you only sell them naked after a huge up day. The premiums get way out of wack and you can make quick money just holding for a couple of days.
Premiums get out of wack because of a good reason eh? Question : How do you know a coin doesn't come up 2 heads in a row?
Quote from jones247:
Actually, the more I consider a short strangle, the more appealing it is to me.
If you are to take anything from this thread, it's this : if you are gonna sell something, stick to your original idea and don't sell naked straddles/strangles.
Quote from a hypothetical, non-lolcat gobar:
How about selling a call on an ETF?
Your gains are limited and so is your risk...
How does that limit your risk?
Bear in mind that we're also toying with using Martingale, which is essentially "keep failing more and more spectacularly till the failing stops".
Quote from jj90:
Exactly my point. The OP is doing this by justifying selling calls after a upmove. Essentially, he is playing the reversal. If the OP was so sure about his forecast, why wouldn't he just short? By selling calls he is neutral to bearish. A mixed bias. If the bias is clear, there are better ways to make money. Selling calls after an upmove is a rangebound bet with implied bias to the downside. A not 'bearish' move doesn't automatically make it bullish.
Premiums get out of wack because of a good reason eh? Question : How do you know a coin doesn't come up 2 heads in a row?
If you are to take anything from this thread, it's this : if you are gonna sell something, stick to your original idea and don't sell naked straddles/strangles.
Just sell them after a big event, news etc. Then all cards were are on the table. Prems get out of wack and even if price goes higher over the next couple days the prems tend to fall. Although you may have to add a few times.
With selling you don't have be right about price. Just right about volatility.
You also have to understand the reason its up. Not all reasons are the same.
John
Quote from jficquette:
Just sell them after a big event, news etc. Then all cards were are on the table. Prems get out of wack and even if price goes higher over the next couple days the prems tend to fall. Although you may have to add a few times.
With selling you don't have be right about price. Just right about volatility.
You also have to understand the reason its up. Not all reasons are the same.
John
If prems get out of wack after a event because it is implying even greater volatility. After an event prems tend to fall, as in the 5 secs after the open on the day after the event occured.
So A) You sell high vol and vol goes higher = implied big move up or down = you don't know
or B) You can't sell 'out of wack' prem cause it deflates instanteously
If you are trading off A, then you can always get in higher, which means you didn't get the top) or trading off B which means you can use a better instrument since it might be a good fade. BTW, you do know a bet on vol is inherently a bet on price.
I agree with you on your 3rd statement, but that is subjective. The OP is talking about an objective system of trading.