Yes, this is a solid strategy. I've done this to get a desired stock at a good discount, also done it and got to keep the premium upon expiration, and one time when it became clear a stock might well drop lower than my desired price, I simply bought back the puts close to a break even point.
Are naked puts really this safe????
- Thread starter RedDuke
- Start date
Yes, this is a solid strategy. I've done this to get a desired stock at a good discount, also done it and got to keep the premium upon expiration, and one time when it became clear a stock might well drop lower than my desired price, I simply bought back the puts close to a break even point.
so now you're changing your strategy? before, you said to sell puts 50 points otm. why are you selling 150 pts otm?
Because:
- the markets moved up nicely yesterday and today but I am not buying this up move as anything major or of any permanence, as yet; of course I would like SPX to zoom to 1350 or higher with VIX swooning to 15, and then I may consider buying back the puts and selling some 1450 calls and 1250 puts!
- This being one of the longest monthly expiration there's still a ways to go before Sep expiration so I wanted more than SPX 50 points cushion away from the market.
Thus, I prefer to sell far otm puts. Nothing is carved in stone, you got to be flexible and go with the flow.
- the markets moved up nicely yesterday and today but I am not buying this up move as anything major or of any permanence, as yet; of course I would like SPX to zoom to 1350 or higher with VIX swooning to 15, and then I may consider buying back the puts and selling some 1450 calls and 1250 puts!
- This being one of the longest monthly expiration there's still a ways to go before Sep expiration so I wanted more than SPX 50 points cushion away from the market.
Thus, I prefer to sell far otm puts. Nothing is carved in stone, you got to be flexible and go with the flow.
Hi guy990opl,
Don't need to reply if you don't want, I just want to show you something. Take all I say as friendly as it's been written.
That's very interesting.
Now imagine there is no theta. Theta doesn't exist. Imagine what you (we) called theta was just a volatility decrease (plus a little interest on something).
(Assume interest rates are zero to vanish the" little interest on something", a decrease of one day in compouned volatility will give you today the tomorrow option price. Remember, yearly volatility for option is just annualized daily volatility)
In this way, you have now to handle with option selling as if you were a volatility seller and a directional gambler. Risks appear more precisely.
"I would not sell options if there was no theta helping the option seller" .
My question :" Why?"
Regards
Don't need to reply if you don't want, I just want to show you something. Take all I say as friendly as it's been written.
That's very interesting.
Now imagine there is no theta. Theta doesn't exist. Imagine what you (we) called theta was just a volatility decrease (plus a little interest on something).
(Assume interest rates are zero to vanish the" little interest on something", a decrease of one day in compouned volatility will give you today the tomorrow option price. Remember, yearly volatility for option is just annualized daily volatility)
In this way, you have now to handle with option selling as if you were a volatility seller and a directional gambler. Risks appear more precisely.
"I would not sell options if there was no theta helping the option seller" .
My question :" Why?"
Regards
wow look at me i crossed the freeway 100 times blindfolded and with ear plugs in.
i am a freaking genius freeway crossing dude! now i know im so good i can do this the rest of my life every day and never get run over by a car!
wow bet i could be just as successful selling naked options! taking out a bank loan in the morning i am!
signed
fool....
i am a freaking genius freeway crossing dude! now i know im so good i can do this the rest of my life every day and never get run over by a car!
wow bet i could be just as successful selling naked options! taking out a bank loan in the morning i am!
signed
fool....
Buying options is as risky as selling options. Slightly different rr profile though. The aggregate is same - how could it not be?
Q, what is a more risky bullish strategy?
1. Selling naked puts - as many as you can but without tapping into any margin
2. Buying calls - as many as you can - again without using margin.
It's a rhetorical question, I hope you see the answer. The answer is...I'll wait.
(fwiw for the first time in a few months I am net long options)
Neither is "better" than the other. Neither is more risky than the other. As dmo said somewhere else, a long or short option is just a tool for you to facilitate your edge (or something like that)
The problem with this oft used analogy is that the two strategies, buying calls and selling puts are not comparable for all practical purposes. Most people who sell puts short are not making any directional bias at all but rather looking for the index to stay above their short strike prior to expiration. The equivalent of shorting puts is not buying calls because both are quite different strategies in how they are used.
The long call buyer is not taking the same position as the short put seller as the two have completely different requirements for the market.
Entering any option position is risky given the expectation of a reward greater than the risk-free rate but one cannot equate the risk of long calls with limited risk and unlimited profits versus short puts since both are not even synthetic equivalents nor used both for same biased trades. Granted, if you are selling cash secured puts for a stock you want to own anyway it is certainly a different risk than a fund selling leveraged short puts in large numbers.
Again I enter into short options positions occasionally. My only issue is with all this talk about the safety of short puts.
Assume you are coaching a learning trader who asked whether there is/are some advantage(s) if one were to implement a given size trade in a given direction (let's say long) which would be done repetitively over a number of N (say N=25) trials:
1. Buying OTM calls at a give strike away from the money.
2. Selling OTM puts at a strike away from the money (symmetrical to the call strike)
(3. Trading the underlying directly. This is optional)
What would be your advice/answer from the perspective of a skilled/expert trader to the learning unkilled trader?
Hi,
I'm sorry but buying options is not as risky as selling options. You're confusing probabilities, expectations and assumed expectations for a pricing model, that basically has to be fair. Reality is not, and doesn't have to be.
Even if the uncertainty for future is the same for a seller and a buyer, payoffs are not. Would you mind giving me probability of an option to be in the money. Would you bet your life on it ? (Cause real probability means you know real law of distribution. Do you?)
An event that has already occured doesn't tell you by now it won't. Probabilities are always misunderstood because intuitively one tends to think that 1 in 100 means if it has already occured one would keep it cool for the 99 followings. Course it's wrong.
Worst, as you are a seller, you have to endure a "vega" risk. Let's get it simple. A drastic increase in volty due to demand and supply may wipe you out by your broker, without a clear link with the underlying. It's a model risk that means it depend only of the way your broker markt to market your position.
Let's assume that your option sold with an implied volty around 30%. Now price it with a volatility around 250%. Same spot, same time, same interest rate...Your position is no more valued with respect of final payoff, but at the current value you may trade. If you're cash limited, your broker is able to close your position. It has nothing to do with the final payoff.
Useless to say that if market prices an implied volty around 250%, your broker won't be the most comprehensive person you ever met.
This case can't happen as you are an option buyer.
Friendly,
Maw
I shiver when I hear the words selling naked options. With stocks, you can only lose the money you invested. With options, you're highly leveraged and you can lose a lot more than the amount you're margined.
His plan to roll them to the next month is akin to playing the martingale game. In order to do that, you also have to get much closer to the money, which means a higher chance of getting ITM. Either that, or you need to double your size or something, which again, is a martingale type of strategy which isn't suitable for trading.
Imagine a simple scenario. Something really bad happens, exchange computers get flooded with orders and there's some computer glitch. You send an order in to buy back your short puts, and you're not executed till the underlying has moved down 10-15%. In the meantime, you've just lost what you've made in the last 2-3 years. This can happen and I think is quite likely to happen.
The problem with selling naked options, is that it makes the person doing it think he's a genius. Because the nature of the game is such that you end up winning most of the time. But all it takes is one unforseen event to wipe out all you've made in all those years, and more.
I wouldn't put any money in his fund if I were you.
His plan to roll them to the next month is akin to playing the martingale game. In order to do that, you also have to get much closer to the money, which means a higher chance of getting ITM. Either that, or you need to double your size or something, which again, is a martingale type of strategy which isn't suitable for trading.
Imagine a simple scenario. Something really bad happens, exchange computers get flooded with orders and there's some computer glitch. You send an order in to buy back your short puts, and you're not executed till the underlying has moved down 10-15%. In the meantime, you've just lost what you've made in the last 2-3 years. This can happen and I think is quite likely to happen.
The problem with selling naked options, is that it makes the person doing it think he's a genius. Because the nature of the game is such that you end up winning most of the time. But all it takes is one unforseen event to wipe out all you've made in all those years, and more.
I wouldn't put any money in his fund if I were you.