Are credit spreads as risky as naked sell of opts ?

Wheezooo said:
1- I'll continue to agree with Bum.

2- "the best answer may be that while both spreads and nakeds have their pluses and minuses, neither is better in an absolute sense. The question to answer is which best suits the individual trader and his/her needs/goals."

Elsewhere, I keep saying that.
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I'm not sure which point makes me laugh more. It's all good, though.
 
One piece of advice and warning on selling credit spreads. Make sure you buy back the short option instead of letting it expire worthless, especially if you are dealing with a large number of contracts. Should you get a sudden price spike that causes your short option to close in the money you will get assigned the stock or have to deliver the stock and your protection is now worthless to you. You will be vulnerable for any gap opening on the next trading day.

That said it can be a good conservative directional bet if you are selling against the trend. Iron Condors (selling both a call and a put credit spread) can work too if in a static market. Risk/Reward is not good but you will have a higher percentage of winners (depending of course on how far you go out on your strike prices).
 
I for one do not seem to have luck with IC's, I do ok with verticals until I don't. I have had the most luck selling naked puts, and occasionally buying calls.
 
Selling naked puts are very dangerous unless you are willing to take possession of the stock if you get assigned. In that case you get the option premium and get to buy the stock at a discount. Some people use that as a way to buy a stock that they want to then sell covered calls on until it gets sold. Then repeat the process.
 
"Why is that VolSkewTrader? How often is the Vix over 35? Looking forward to your reply so I can understand better, Thanks, James"



That is just my personal risk/reward threshold. Illini Trader has a better rule of thumb of where you have to be willing to buy the stock at your short put strike price (minus the credit you received) if the market goes there.

VIX rarely goes above 35, let alone 30+, but at those levels selling very expensive naked puts makes much more sense than selling low VIX environment cheap OTM puts that can easily come into play with an unexpected abrupt decline in the stock or index. On a major market correction like Monday (yesterday) you may be forced to buy a stock or index at a price you don't want because you sold naked puts a day or week beforehand.

But if the VIX is trading at historically high levels like 35+, you're giving yourself much more 'breathing room' on another leg down in the market due to the excessively high option premium credit you took in. And if you somehow get assigned on your naked puts, you'll likely be buying the stock or an index close to the bottom of the correction.
 
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