I used to want to be a fund manager. I failed Level II of the CFA, and that was that. I hated to say it, but I was actually relieved in a way.
I certainly wouldn't want to be in Bill Miller's shoes at Legg Mason either.:eek:
Are naked puts really this safe????
- Thread starter RedDuke
- Start date
I used to want to be a fund manager. I failed Level II of the CFA, and that was that. I hated to say it, but I was actually relieved in a way.
I certainly wouldn't want to be in Bill Miller's shoes at Legg Mason either.:eek:
It is important to know how many puts they are short in comparison to the principal.
If they are not using leverage if they are assigned - then it's actually a valid strategy.
If the market tanks and they find themselves short a large number of costly puts with a leverage of say 5 to 1, then margin calls will be coming.
$10mm would prescribe about 800 short puts, with no leverage if a black swan event occurs. If they are short 3000 and up, eventually there will be a blowup.
Find out how many short puts vs capital. Their 'edge' is the assumption that buying OTM puts is a losing proposition.
Writing puts theoretically has limited risk, but its limited to the total value of the stock 
. A good question would have been what would they do if they faced a situation like BSC happens, there are enough threads and here's the link from bloomberg:
http://www.bloomberg.com/apps/news?pid=20601109&sid=aGmG_eOp5TjE&refer=home
wonder who wrote those puts.
Anyways such trades happen every month. Maybe not the same intensity but as BSC but similar. For example:
On the 11th Aug i purchased a lot of GS 165 strike Aug 08 P at 0.26. It was cheap and a pretty high probability bet for me. But someone may have written them (unless of course they were closing an existing position). On 12th I sold 'em for 2.57 on an average.
Is that limited risk. Hell NO!! Assuming that someone DID write those puts they lost 1000% over what they were intending to make in a profit and it happened in under 24hrs.
I wouldnt give a strategy that relied on writing puts only a single penny.
. A good question would have been what would they do if they faced a situation like BSC happens, there are enough threads and here's the link from bloomberg:http://www.bloomberg.com/apps/news?pid=20601109&sid=aGmG_eOp5TjE&refer=home
wonder who wrote those puts.
Anyways such trades happen every month. Maybe not the same intensity but as BSC but similar. For example:
On the 11th Aug i purchased a lot of GS 165 strike Aug 08 P at 0.26. It was cheap and a pretty high probability bet for me. But someone may have written them (unless of course they were closing an existing position). On 12th I sold 'em for 2.57 on an average.
Is that limited risk. Hell NO!! Assuming that someone DID write those puts they lost 1000% over what they were intending to make in a profit and it happened in under 24hrs.
I wouldnt give a strategy that relied on writing puts only a single penny.
buying otm puts is as losing proposition as selling them. in the run it is a strict zero sum game.
as you have stated already, it all depends on whether they're using leverage or not and whether they have a valid timing strategy to sell the contracts.
if they do, then selling otm puts is a valid strategy that offers an exceptional risk to reward trade off.
in case they have a very solid (close to bullet proof) timing model, then i would accept they additional leverage, so it can improve return on capital. in any case, there many CTA's and hedge funds in this business and the best ones are very well managed. most of them have state of the art risk modeling in place to avoid being wipe out by a black swan event.
EDIT: dont forget that selling otm puts on an index is equivalent to buying the index at discount. this is always a good strategy for someone that whats to own that asset. it all comes down to how it is being implemented.
"EDIT: dont forget that selling otm puts on an index is equivalent to buying the index at discount. this is always a good strategy for someone that whats to own that asset. it all comes down to how it is being implemented"
Absolutely wrong. Selling an OTM put for $2 is not the same as owning 100 shares of the SPY. You've maxed your upside to $2! A short DITM put is close to a synthetic long position though.
Absolutely wrong. Selling an OTM put for $2 is not the same as owning 100 shares of the SPY. You've maxed your upside to $2! A short DITM put is close to a synthetic long position though.
Let me just list three points:
1. August 2007
2. 9/11
3. Martin Luther King weekend 2008
Being up does not cover the risks of naked puts nor does it do away with volatility risks. I am sure many make money for a while but most get that big bad week or day and naked puts represent unbounded risk (or better said significant risk). If the market drops heavily on them, rolling to the next month is irrelevant. When short puts at $2.00 suddenly gap and jump to $20, the margin call prevents being able to do any rolling except take the loss. At least if they sold put spreads they could define the risks ahead of time or put a specific cap on risk. But in the current market environment, selling naked options is extremely risky.
Of course I do not know how much of their account they are leveraging so I cannot say for sure how much risk they are truly taking on. My original comments were more how they were phrasing this strategy as low risk which proves the ignorance of the fund managers.
These guys will blow up soon and 100% up year to date will seem like a distant memory.
We cannot set aside the leverage they employing because that is the true risk in short options, the leverage used to get significant returns.
And for someone such as those fund managers to say as an example that they can immediately protect themselves and lose only commissions is truly a bad thing to say to a room of newbies who dont understand options. Indexes can be as bad as stocks.
You have to realize that their marketing approach is akin to lying to prospective investors by portraying their approach as low risk.