Are naked puts really this safe????

[hlpsg]

Quote from optioncoach:

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. [/B]

If they were highly leveraged, I think they might even have a problem entering orders into their brokerage platform to get out of the losing trade if IVs really exploded, as they'd have tied up all their margins I expect.

As the markets are tanking, they start to panic and try to get their brokers on the line to help them close out the positions as the markets go down with every tick....

Scary!

 

[hlpsg]

Quote from Jahajee:
So, I am again reiterating that you can sell SPX puts about 50 points away from current market position and piut a sell stop order a few points above the put strike for protection. You may still lose on a few trades but on most trades you will win IF YOU MANAGE THE TRADE PROPERLY. I do say that you shoudl sell puts and forget about the trade and you will make zillions. Let's be real. [/B]

I'm assuming you've done this before, do you mind sharing on the following?

What happens when the underlying hits your futures trigger point early on in the trade (i.e. your put has 25 days left), and the puts you sold still has a lot of time value left in it? Will you close out the position once your futures get triggered, or do you hold it till expiry?

If you take the loss, how many months premiums has that cost you? I'm assuming it'd have cost you a lot, and IVs would have gone way up if that happens.

If you hold, what do you do if the underlying price whipsaws around your trigger price? How many ticks up will you plan to buy back your futures?

Thanks.

 

[makloda]

A lil' reminder of what happened in January to many put writers that thought they could simply 'trade around' any type of gap situation.

 

[makloda]

Quote from hlpsg:If you take the loss, how many months premiums has that cost you? I'm assuming it'd have cost you a lot, and IVs would have gone way up if that happens.

If you hold, what do you do if the underlying price whipsaws around your trigger price? How many ticks up will you plan to buy back your futures?

He won't reply. You exposed his ridiculous 'stop strategy'.

 

[El OchoCinco]

Quote from riskfreetrading:

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?

I would never tell an unskilled learning trader to sell naked puts, end of discussion. Also as I said a naked put is not an equivalent to a logn call so the comparison is apples to oranges.

 

[moonmist]

Quote from makloda:

A lil' reminder of what happened in January to many put writers that thought they could simply 'trade around' any type of gap situation.

This is really bad. A monthly return of negative 24.28% can easily translated to a maximum draw-down of almost 50% in January 2008. :eek:

IMHO:

The Annual Max. Draw-down reported by this fund may be misleading. "Biggest negative monthly return for that particular year" may be a better term. I ***GUESS*** the peak-to-trough draw-down of the fund in 2007 could easily be larger than 25%.

 

[dmo]

Quote from riskfreetrading:

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?

You wrote "unkilled trader" instead of "unskilled trader." I like it your way better.

If I were counseling an "unkilled trader" who wanted to remain unkilled, I would never counsel him to do any of the above in the random manner suggested. Buying options because it's Monday is not a strategy. Selling options because it's Monday is not a strategy. It's like closing your eyes, rolling the dice, and asking which number a skilled trader would bet on. What you're talking about is gambling, not trading.

Paying attention to what's going on around you, noticing when extreme emotion pushes something out of line, making a play betting that will be temporary - that's trading.

Emotion is contagious, so it will be emotionally difficult to fade the crowd. The more emotionally difficult - then probably the better the trade. To me the essential ability of a trader is to somehow locate the tiny voice of reason being drowned out by the ocean of emotion making you panic along with the herd - and ignore the ocean and the panic, and follow the tiny voice. Not easy.

 

[Prevail]

I've been in & out, sorry if I missed it. do you still like wthotm put spreads?

Quote from optioncoach:

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.

 

[BeatingtheSP500]

Quote from riskfreetrading:

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?

I think your point is that it is less risky to sell consecutive monthly puts just OTM, provided you are not using any margin, and cash can back up your assignment if needed. I actually cannot think of a more conservative option play over the long run. I have to stress though the trade must be backed by cash to cover the assignment. If they go ITM at expiry, they're bought backed and rolled over.
Another similar strategy would be buy a 6 month 5% ITM call, and fund the purchase with selling consecutive monthly 2% OTM calls.
As far as #1 goes: My guess is you would be far worse off buying otm calls and rolling them over every month.

 

[BeatingtheSP500]

Quote from hlpsg:

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.

You don't HAVE to be highly leveraged with options.
And rolling over to the next month has nothing to do with Martingale. It is a consecutive capture of ~3% of the stock price every month REGARDLESS of where it is trading. There is no double-down.
And the problem with BUYING options is the person thinks they are super genius when they win. Genius can fail not just sellers.
The danger of the game people is fucking leverage. It ain't buyin nor sellin. It's LEVERAGE. Examine a couple blow-ups from the top of my head right now:
LTCM
Neiderhoffer
BSC
Amaranth

If anyone can add some more lets's hear 'em. The killer you find throughout all is going to be leverage though.

Again, the act of buying an option is no less risky than selling an option. The r/r profile is different. Find your edge, then use an option trade to facilitate it, be it buying or selling. They are just tools, NOT STRATEGIES IN THEMSELVES.