Are naked puts really this safe????
- Thread starter RedDuke
- Start date
Selling naked puts is a very effective strategy but of course the other part is that there are many ways to do it and hedge funds and money manager that are consistent in the long run don't really share the whole picure, and yes if it was easy everyone would do it, but all strategies work if one knows how to apply them.
Keep in mind that when we deal with options time is a huge factor and time works in favor of the option seller.
If you buy an option to make money you need to be right on
1) direction 2) price 3 ) timing
...meaning the stock/etf has to move either up or down , go beyond your strike price and do all of it within a certain amount of time. If you are wrong on just one of the three things you will lose money.
Let's say now that you sell an option, a naked put
1) if the stock/etf goes down a little bit you make money
2) if the stock does not go anywhere you make money
3) if the stock goes up you make money
This is part of the reason why selling options has more probability of making money than buying options.
HOWEVER: in the long run if you don't use strict discipline and money management you will surely blow up your account as we all know all it takes is one time when selling naked puts see bsc enron sept 11 etc etc
Obiously I am an options seller but please understand I am NOT saying that selling is better than buying, again it comes down to what one does and what kind of money management one uses. The bottom line is that all strategies work if one knows what s/he is doing.
Also when one says that selling naked puts is dangerous or crazy one does not know what s/he is talking about.
Are naked puts safe ?
It all depends .
Hi RedDuke,
Please be clever don't follow blindly what a scenario seems to show. When things go wrong, even with european style options things can be worst.
As you write put, you have to take care of some risks. The market drops and you need to meet two choices:
-You wrote american style puts and now you play a wonderful game called "when would I be exercised? I don't know yet, the game goes on."
- you wrote european style puts (most of index options) cause you thought it was safer.
The point is if you are very deep in the money with european put, you will witness that, due to cost of carry, the roll over next month will be very costly.
Without talking about transaction costs, spreads, volty, liquidity holes...you will see that front month is much expensive than back one (don't trust me, price it).
As long as you roll over the position, you lose money. Worst, if there is an interest rate hike (as in a high inflation risk market), once again due to cost of carry, you will lose much more money.
Be careful and price it.
Cheers
BTW an old example of what happen with short puts/covered calls
Assume volty is about 30% (numbers are here to simplify the case) Options are european style. Spot start at 100$. No transaction cost, no spread....interest rate and volty steady...The world is yours.
First month at the beginning spot is worth 100$. You purchase the spot and write a call At The Money for about 3,6$.
At the end, spot is worth now 110$. You are exercised, but you're happy, 3,6% a month. Great. You gonna make it for a living.
Second month starts, you purchase the spot at 110 and write a call ATM strike 110 for 4$.
At the end of the month, the spot is worth about 100. You're not exercised. You own a spot at 110 but you received 3,6+4=7,6. Your global position is a loss of 2,4 and it's as if you bought your spot at 102,4. (useless to notice that it's worst you just bought the spot last month at 100$...)
Month number three, you already own a spot, you decide to write a call ATM strike 100 for 3,6.
At the end of the month, the spot is worth about 90. You're not exercised. You own a spot at 110 but you received 3,6+4+3,6=11,2. Your global position is a loss of 8,8 and it's as if you bought your spot at 98,8.
Month number four, you already own a spot, you decide to write a call ATM strike 90 for 3,2.
At the end of the month, the spot is worth about 100 (THE SAME THE FIRST MONTH).
You're exercised. You sell the spot that you've purchased at 110 for 90 an make a loss of 20$ but you received 3,6+4+3,6+3,2=14,4$. Your global position is a loss of 5,6$.
This to show you that a spot which just came back to its initial level make you write a loss. Course it's not unusual.
The question is: writing options is a broadly known strategy. Over the country, how many millionaires with this type of strategy ? Are the others just too stupid ? I don't think so.
Regards
Hi Guy990opl,
I respectfully disagree. You've just make little a mistake. The problem is not about probabilities, it's about expectations. You need to put the pay-off in your formula.
If you make 100 times 1$ and once you lose 150$, you finally lose 50$. That's because there is this risk of losing 50$ that you can now seem to make easy money. Don't forget the pay off.
Options are priced a way buyer and seller got the same expectation. That means if you earn money often, one loss is enough to keep the game fair. Hence the loss will be much bigger.
No free lunch.
Regards
he he he lol rotflol like i said fool...
btw i worked for the worlds largest option seller "the worlds largest"! undisputed!
i know all about selling naked! it's not for people who have blood in their veins. only ice water need apply. i can tell you so many stories no one would ever believe!
mark brown
<i>"Also when one says that selling naked puts is dangerous or crazy one does not know what s/he is talking about."</i>
The question I have is, who in the heck is selling puts right now? Premium sellers sell calls in downtrends, puts in uptrends. When it comes to index options, naked calls or puts have an equal degree of risk... naked calls are no riskier than puts. Indexes gain ~ lose value in equal degrees both ways, unlike stocks.
First & foremost, selling calls into rallies at resistance and puts into selloffs at support is where to start. Anyone who is fixated on selling index puts alone is ignorant to begin with. They ain't stocks... completely different world in the SPX.
The question I have is, who in the heck is selling puts right now? Premium sellers sell calls in downtrends, puts in uptrends. When it comes to index options, naked calls or puts have an equal degree of risk... naked calls are no riskier than puts. Indexes gain ~ lose value in equal degrees both ways, unlike stocks.
First & foremost, selling calls into rallies at resistance and puts into selloffs at support is where to start. Anyone who is fixated on selling index puts alone is ignorant to begin with. They ain't stocks... completely different world in the SPX.
The sillyness continues... You cannot even stop from contradicting yourself.
Naked puts are not safe, and it does not depend. Safe is reserved for treasuries and CDs, not naked options. Can you make money doing it? Sure any strategy can make money but there are no old-timers selling puts for a living, only those with stories about how they blew up after many years of making money.
At a minimum I would advocate put spreads over naked puts which shows a little more respect for the risk.
