Are naked puts really this safe????

[El OchoCinco]

Quote from optioncoach:

Well it was both call and put spreads either one side or both sides. After vols picked up drastically last summer I moved away from it. I always said it worked well in the then vol environment when VIX was 10 - 18. It was about 3 - 4 years of nice vol. People mistkenly did not realize that 10 -15 VIX is a great time to do spreads not when vols are 25.

But after VIX started moving higher even before AUG, the market envvironment changed and I adapted. More FLYS now or legged into spreads.

 

[riskfreetrading]

Quote from optioncoach:

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.

I disagree. To see why letme consider the case of zero interest, no carry, same vol. across all strikes. We have these observations:

1. The expected payoff of the call buyer is the same as the expected payoff of the call seller for the call strike.

2. Now by symmetry, the expected payoff of the seller of the OTM call will be the same as the expected payoff of the OTM put seller.

3. Combining 1. and 2. we have: The expected payoff of the OTM call buyer is equal to the expect payoff of the OTM put seller.

Therefore, over N trials, as specified in my note (read it below), buying the OTM calls or selling the OTM puts are the same thing under the assumptions above.

What OptionsCoach seem to see is the difference between the two at a given trial. (One has to look at the war, not at individual battles). They may appear as "oranges and apples" for a given trade outcome, but as a trading strategy they are not different over N trials, as otherwise pricing will be incorrect.

Now given my comments, which implementation should one recommend to a beginner and why: 1. or 2. (or other)?

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?

 

[hlpsg]

Quote from BeatingtheSP500:

You don't HAVE to be highly leveraged with options.

Yes I agree with you. However, the OP stated that the fund made 100% returns a year. I think to make those kind of returns, you need to be quite highly leveraged if you're selling naked 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.

Could you elaborate on what is meant by a "sonsecutive capture of 3% of the stock price regardlss of where it's tradng?" I don't quite understand this part.

I think the OP stated that the fund manager said something like a losing month not being a problem, if he took a loss in one month, he'd roll it out to a further out month.

I may be wrong on this, but the understanding I had was that he was telling him he can't lose trading this way, as he'd just roll the "paperloss" to the next month. My point was in order to do this, you either need to increase your size, or go much closer to the money.

 

[BeatingtheSP500]

I don't know exactly what they were doing, so it's really speculation on my part. My guess is they were rolling the puts over every month, but not increasing the total equiv SPY deltas from the previous month. They may have maintained a constant 2% OTM strike.

Looking back on some others posts from the OP, it was stated there was a highish 200 contracts sold per $1mm, but now is at a 100 contract clip per $200, which still indicates some leverage.

And you are correct, that a 100% per year return absolutely reflects an unacceptable level of leverage. But don't equate selling naked with unacceptable risk.

 

[blackjack007]

Quote from BeatingtheSP500:

You don't HAVE to be highly leveraged with options.

if you want to make a decent return by selling premium, you have to be leveraged. the return from selling cash secured options is so miniscule, it's the leverage that makes it profitable.

 

[IV_Trader]

Quote from riskfreetrading:

Are you Jewish?

Is your mama a whore ?

 

[RichardRimes]

haven't you put him on ignore yet? :eek:

 

[BeatingtheSP500]

Quote from blackjack007:

if you want to make a decent return by selling premium, you have to be leveraged. the return from selling cash secured options is so miniscule, it's the leverage that makes it profitable.

It's certainly more than miniscule if you are not leveraged (cash deposit to fully cover a possible assignment). There's about 2% premium for the next 4 weeks until the Sept expiry for SPY options, which is not out of the average range for the long term.

 

[BeatingtheSP500]

Quote from BeatingtheSP500:

I don't know exactly what they were doing, so it's really speculation on my part. My guess is they were rolling the puts over every month, but not increasing the total equiv SPY deltas from the previous month. They may have maintained a constant 2% OTM strike.

Looking back on some others posts from the OP, it was stated there was a highish 200 contracts sold per $1mm, but now is at a 100 contract clip per $200, which still indicates some leverage.

And you are correct, that a 100% per year return absolutely reflects an unacceptable level of leverage. But don't equate selling naked with unacceptable risk.

I meant to say "but now is at a 100 contract clip per $1mm, which still indicates some leverage"

$200 would have been Niedderhoffer-esque!

 

[JSHINV]

I didn't read every post on this thread; but got the main points. Seems to me selling or buying verticals (buy one/sell one), in terms of risk/reward, is so much more superior, than selling naked calls or naked puts. There is a little less reward on a vertical; but the reduction of risk relative to naked sales is exponential.