A Fortune in Selling Naked Call Options (w/Martingale)

[jones247]

Quote from ProfitTakgFool:

We went close to 30% in 60 days back 1998, following the crash. For the sake or argument, let's say traders, or option writers, got more bearish when the market went to a lower low. They would have gotten smoked if they were naked. The most compelling part against your strategy is, even if you waited for a 10 or 20% bounce it still wouldn't have worked because the market never even looked back.

Before you develop any strategy you first gotta go to the "Anything can happen" University. You can't fully appreciate the power of the market until you understand those three little words. They are just words to live by.

Good point profitTakgFool... However, if only once since 1998 would we lose, then that helps to validate the potential power of this system. Losing once every seven years is a great win ratio. I'll take that every time. The loss would only set me back the equivalent of only 6 - 8 premiums at the most. Over the seven year span I would have collected one premium (assuming only 1 contract sold) per month for a total of 84 premiums.

Walt

Walt

 

[atticus]

Walt -- selling 5% otm XYZ at $100 a share at 30% vol reflects a 1.50 call. Let's assume you trade cash-secured and allocate $10,000 each month per call. HTF am I getting rich on a max-gain of 18% per annum? Please don't even consider compounding that return.

 

[jones247]

Quote from atticus:

Walt -- selling 5% otm XYZ at $100 a share at 30% vol reflects a 1.50 call. Let's assume you trade cash-secured and allocate $10,000 each month per call. HTF am I getting rich on a max-gain of 18% per annum? Please don't even consider compounding that return.

Hi Atticus,

I would structure my transaction differently. I would sell ATM or even just ITM after a big upswing & it appears that the stock or index is overbought. I would seek an IV of at least 45 or so, preferably with a 30 day expiration. The premium in such a scenario as this would yield about 15% of my margin requirement for the 30 day period.

Walt

 

[forex-forex]

Quote from jones247:
I would sell ATM or even just ITM after a big upswing & it appears that the stock or index is overbought.

Very few people - if any - can consistently call the top or bottom, in this case you are trying to catch the top.

 

[atticus]

Quote from jones247:

Hi Atticus,

I would structure my transaction differently. I would sell ATM or even just ITM after a big upswing & it appears that the stock or index is overbought. I would seek an IV of at least 45 or so, preferably with a 30 day expiration. The premium in such a scenario as this would yield about 15% of my margin requirement for the 30 day period.

Walt

So, you'd feel comfortable selling 6 calls per $10k in equity? Please produce one mega-cap that fulfills your criteria with a 45% vol. So you're stating that GE or MSFT see large increases in vol on 10% moves?

It seems as though there is no end to your manufactured facts. More often than not, vols decline on large moves in the large caps as the result of institutional call selling. I could elaborate, but there is little to be gained. You'll simply come back with some fiction.

 

[jones247]

Quote from forex-forex:

Very few people - if any - can call the top or bottom, in this case you are trying to catch the top.

I'm really not trying to catch the top, in as much as I'm utilzing the martingale to protect the fact that I probably did not catch the top. After the option doubles in value against me (with 1 contract). Then I would double up (i.e. 2 contracts) with an additional ATM sell.

Walt

 

[forex-forex]

Quote from jones247:

I'm really not trying to catch the top, in as much as I'm utilzing the martingale to protect the fact that I probably did not catch the top.

But you have to catch the top, if you don't then you could be screwed selling ITM/ATM call options. You would have sell the OTM options with the low premiums.

When you get down to the math you will find there is no free lunch.

 

[robbie380]

so what is holding you back?

 

[newguy05]

Quote from jones247:

I'm really not trying to catch the top, in as much as I'm utilzing the martingale to protect the fact that I probably did not catch the top. After the option doubles in value against me (with 1 contract). Then I would double up (i.e. 2 contracts) with an additional ATM sell.

Walt

Doesnt that require you to have a LOT of cash for the margin to naked short and then double down?

I would think selling otm call spread be a better alternative, everything else stays the same (ie: try to sell after a big move up etc..)

why take on such risk? selling atm naked calls.

EDIT: since we on the same topic, do you guys think below will work?

1) sell otm(both legs) strangle
2) then at the same time place 2 gtc buy to cover limit orders 1 for each leg when underlying = call/put strike price

basically you are still unprotected against afterhour movements/gaps, but should be safe during market hours? would this work long term

 

[jficquette]

Quote from jones247:

I posted the following strategy on another forum; however, I did not get any response. It seems that there are several experienced options traders at this forum. Please provide your input on what I believe is a sound strategy listed below:

An individual could have been making about 15% - 20% per month writing (selling/shorting) naked call options over the last 3 - 4 months. If after a huge upswing break-out, one would write a call option in/at-the-money, it would yield a reasonably safe return. The common belief that selling options, especially calls, is VERY RISKY is a "red herrin". Although one is allowed to sell puts in an IRA, the selling of calls in an IRA is disallowed. The logic is really unreasonable. Although the market trends upward over the course of time, the reality is that it plummets in a short span of time, but rarely skyrockets in a short span of time. I would be VERY NERVOUS selling puts because any number of "black swan" events could occur that send sheer panic thru the market; thus causing a castostrophic collapse of the market. In the selling of calls, one need not worry about any geo-political or natural disasters, as such events would only secure the position of an individual who sells calls.

Now the obvious question.. what if the market goes up against my position, especially if I'm selling ATM or ITM? Good question... that's where the notorious martingale system comes into play. I know, I know any mention of the word martingale is considered an anathema of the worst kind; however, if used in moderation and with discretion, it can be a powerful tool. So, how would I use the martingale strategy? Well, I'm glad you asked... if the trade goes against you by twice the value of the premium received, then cut your loss and sell twice as many contracts/lots. Remember, the entry point comes after a big break-out, and the 1st liquidation after a 8% - 13% increase on top of the break-out.

HOW MANY TIMES HAS AN UNDERLYER RISEN MORE THAN 30% IN A MONTH? HOW MANY TIMES HAS AN UNDERLYER FALLEN MORE THAN 30% IN A MONTH? Euphoria will cause the market to rise slowly, but consistently, with a few sharp upward surges. However, fear and panic will cause the market to plummet in a fast freefall!!!

Resp went up 30% over night. How do you handle that if you are short a boat load?

Buyouts kill you and you never know when they coming.



John