Are naked puts really this safe????

[riskfreetrading]

Quote from optioncoach:

If you mean vol increase, then I addressed it. Again I said in most cases. If you are asking about exception to the norm cases then that is the exception one can never predict.

If implied vol increases too much, one might be shaken out of the position because of potential margin problems on short call (if not covered or not implemented correctly if naked), even if underlying does not move and option OTM.

Also what is your initial plans on the holding period (until the end/close to the end vs. plans to definitely close it early)? This may have an implication on the volty discussion that took place in recent posts.

 

[blackjack007]

Quote from optioncoach:

Honestly in this environment I would not even sell naked puts given the downward bias lately. If you put a gun to my head to sell naked options I would sell calls only for right now. At least I would not have to worry about a vol explosion in most cases. market looks like it has more downside to sideways chop in it so calls seems like a shorter sword.

the risk is priced into the option. due to the downward bias, puts are more expensive now so you'll be rewarded more handsomely. there is no less risk writing an 8% otm spx call than writing a 13% otm put. they have the same premium.

you are suggesting that there is an inefficiency in pricing of calls vs. puts

 

[newguy05]

This is pure comedy, i actually loled. Optioncoach made a comment about selling call instead of put if a gun was to his head, and now he's getting tag teamed by 4 people.

ROFL!

 

[newguy05]

Quote from blackjack007:

the risk is priced into the option. due to the downward bias, puts are more expensive now so you'll be rewarded more handsomely. there is no less risk writing an 8% otm spx call than writing a 13% otm put. they have the same premium.

you are suggesting that there is an inefficiency in pricing of calls vs. puts

That's true, basically you are saying for equal premium you can write a further OTM put than call, therefore the risk remains the same.

But lets say if SPX is at 1300 and you write the sym 1350C or 1250P.

Even if you received more premium on the 1250P. When the underlying moves against you, isnt it often the case vol increases MORE when SPX is moving downward. Therefore arent you better off holding the call instead of a put when the underlying moves against you DESPITE the fact you will receive more premium for the put.

 

[MasterAtWork]

Quote from newguy05:

That's true, basically you are saying for equal premium you can write a further OTM put than call, therefore the risk remains the same.

But lets say if SPX is at 1300 and you write the sym 1350C or 1250P.

Even if you received more premium on the 1250P. When the underlying moves against you, isnt it often the case vol increases MORE when SPX is moving downward. Therefore arent you better off holding the call instead of a put when the underlying moves against you DESPITE the fact you will receive more premium for the put.

I'm sorry but it's wrong. Volty is largely sensitive on short term maturity. For long term maturities, volatilities don't jump. That is why you have a bigger effet when it change, a much bigger vega. 'cause it won't change easily.

Coach, don't you think as far as you will be deep in the money, implied vol will tend to decrease. We're talking about stock index.So due to the skew for the same absolut deviation around the strike, vol will help you if you sold a put. Furthermore, if there is a rebound, volty will drop largely. Until now we have never seen an index value at zero, so the size of the slide seems to be limited.

To be simple, when underlying move AGAINST you

Short Call, delta against you, vol against you
Short put, delta against, vol for you.

 

[riskfreetrading]

Quote from MasterAtWork:

1. Furthermore, if there is a rebound, volty will drop largely.

2.

To be simple, when underlying move AGAINST you

Short Call, delta against you, vol against you
Short put, delta against, vol for you.

Maw,

With regards to the discussion in point 2, I understand that what you mean is the impact of the implied vol changing as function of distance of strike to underlying price, and whether it is below or above the price of the underlying.

But if you use point 1., there is also a reduction of vol across all strikes.

So the overall effect is rather the combination of points 1. and 2.

In addition, I think the discussion should also consider whether one holds till the end. In such case, the changes of vol as per the discussion above may not be the real issue. Instead, the real question would be whether the implied volty sold is higher than or lower than the realized (the one to be revealed not the historical one) volty.

 

[MasterAtWork]

My point is, for sure whether the market make a big gap up or down, there will be an implied volatility increase. Broadly the same risks for calls and puts.

But a continuous slide to a short put seller is much more better than a continuous rise to a short call seller.
For stock indexes, due to the skew if you're deep in the money for a put, vol is low, if you're deep in the money for a call, vol is high.

 

[jagmot]

Quote from Bushido:

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.

I know someone who was short BSC puts. Me.

You can see the post here.
http://www.elitetrader.com/vb/showthread.php?s=&postid=1837820&highlight=bsc#post1837820

and a few after it...

(I was short BSC originally both the stock and naked calls and made good money but not enough to cover the BSC loss)

Selling naked options is risky, however cash covered puts are not risky. Theoretically, you cannot cash cover a call but in reality there is a limit. I use a double as my coverage on the call side.

 

[jagmot]

Quote from BeatingtheSP500:

Selling ATM puts without leverage is a valid strategy, however these guys are up 100% and that screams there is MUCH more risk than what they think.

Agree 100% on both points here.

 

[jagmot]

Quote from blackjack007:

the risk is priced into the option. due to the downward bias, puts are more expensive now so you'll be rewarded more handsomely. there is no less risk writing an 8% otm spx call than writing a 13% otm put. they have the same premium.

you are suggesting that there is an inefficiency in pricing of calls vs. puts

OC has a directional bias. He is stating that there is more risk to the downside, ie. he thinks the market is heading lower. He is not saying that the pricing of calls is inefficient to puts. Nice try though.