Are naked puts really this safe????

[hlpsg]

Quote from dmo:

There are 45 days remaining until option expiration. Futures are at 104-16/32. I buy 100 of the 104 calls at a volatility of 8%. I sell enough 106 calls to be gamma neutral, selling them at a volatility of 8.3%. I figure out my total position delta, and make a trade in the underlying to become delta neutral.

T-bonds move up to 105-16/32. Now the 106's - which I'm short - are at the money and their IV drops. The 104's - which I'm long - are OTM and their IV now goes up. The 106's now are trading at a volatility of 8%, the 104's at a volatility of 8.3%.

I buy in my short 106's at 8%, sell my long 104's at 8.3%, and take off the futures. I guarantee you I have a profit.

Try working out a scenario for yourself. Great exercise - Shelly Natenburg and Charlie Cottle were doing it at the time - that's how they learned.

If you can't make it work, come back and we'll figure out why.

Does this work only with commodity options, or will it also work with stock or stock index options?

 

[Profitaker]

Quote from newguy05:

Can you have a true directional neutral position (net delta=0 + net gamma=0 always)? meaning if tomorrow the underlying gaps up 200% or drops to 0, your only gain/loss will be due to theta and vega. Is that possible, i cant think of a way.

Absolutely not. I had thought that this was precisely what dmo meant, a free lunch if you like, but alas that's wasn't what he meant. Sure a spread can be made delta and gamma neutral for any given spot, but as the spot moves so does delta / gamma. Only spread where all option moments are equal and opposite (i.e. delta / gamma will always be neutral) is a box, where you'll only earn the risk-free interest rate.

dmo

I plugged your scenario into my software and come up with a loss if the bonds move lower. Be interested to hear how you think otherwise. Cheers.

 

[Jahajee]

Quote from Jahajee:

Sell 50 SPTUJ @1.25 (September SPX 1150 puts)

Sell Stop SPU8 @1200

Will consider any of the the following, depending on market conditions:
- adjust sell stop SPU8 higher depending on possible rate of decline of SPX.
- sell more SPX naked puts if market goes above 1300
- sell SPX 1125 or 1075 puts if SPX approaches 1225
- buy back SPX 1150 puts & sell SPX 1225 puts if SPX moves up, a big range up day, to say 1350
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Looking to sell CALLS in the strike zone of 1380 to 1420 (SPX).

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I am going to sell 25 to 50 SXYIM or SXYIN (SPX 1365 or 1370 calls) ; may sell in 2 batches if I can't get a good fill on 50.


I will short SPU8 for a day trade - looking for overbot on the
5-m.

Will update log.
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Except for daytrading SPU8 (scalping a point or two on 3-lot trades) I haven't added to the SPTUJ position.
Looking for a short SPU8 daytrade around 1282 OB.


I am bidding on SPX 1125 put - yeah, I want to hedge and release margin.
Still want to sell the OTM calls in the 1365 to 1380 range.
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Looking to buy 25 or 50 Sep 1125 puts at about 0.35 or better; TOS bid/ask is now 0.35/0.50
I hope I can get filled on this nice little rally we are having today.

If filled, I will consider selling Sep calls, strikes 1370 to 1390.

 

[exQQQQseme]

Why not insure these "naked" puts with a low premium (high copay) long Puts?

4Q

 

[RichardRimes]

Quote from exQQQQseme:

Why not insure these "naked" puts with a low premium (high copay) long Puts?

4Q

do you mean a "spread"?

 

[dmo]

Quote from hlpsg:

Does this work only with commodity options, or will it also work with stock or stock index options?

I mentioned as an aside how we were trading T-bond options in 1984, and somebody asked me for a specific scenario. But please don't misunderstand - this was not meant to imply that this will work today for a retail trader without access to order flow - for someone buying the offer and selling the bid. It won't.

 

[dmo]

Quote from newguy05:

Can you have a true directional neutral position (net delta=0 + net gamma=0 always)? meaning if tomorrow the underlying gaps up 200% or drops to 0, your only gain/loss will be due to theta and vega. Is that possible, i cant think of a way.

Careful Newguy - the art of maintaining an option position delta and premium neutral is a subject near and dear to my heart - one I lived by and died by for many years. If you get me going on it you may regret it!

No, you can't achieve the kind of perfect neutrality you mentioned. But I think you would be surprised how neutral you can be.

When I was in T-bond options I traded all the months, some of which were quite illiquid. I had to buy what the paper was selling and sell what they were buying, so I would quickly build up pretty big positions - usually 5-6,000 options (if you added up all the longs and shorts) against up to 500 futures long or short to maintain delta neutrality. All I wanted to do was maintain that position as neutral delta and premium as possible, all the time buying premium where it was cheap and selling it where it was expensive.

That may sound like a big position but as long as there is time remaining, it's not that hard to maintain it very, very neutral. That breaks down as you approach expiration, and a position like that would become unmanageable. My rule was to be out of everything in the front month by the time there was 15 days remaining - preferably earlier. But the more time remaining, the more stable the position is and the easier to manage. It's one reason why I like trading back months.

The ideal premium-neutral position is to be long the wings and short the middle. That way, if volatility goes up, you become long vegas and make money. If volatility goes down, you become short vegas and make money. Sounds strange but it's true. Try it and you'll see. It's one of the reasons for the classic "smile" of volatility. And if you get those 10-sigma moves, you'll make nothing but money.

 

[riskfreetrading]

Quote from dmo:

The ideal premium-neutral position is to be long the wings and short the middle. That way, if volatility goes up, you become long vegas and make money. If volatility goes down, you become short vegas and make money. Sounds strange but it's true. Try it and you'll see. It's one of the reasons for the classic "smile" of volatility. And if you get those 10-sigma moves, you'll make nothing but money.

Very good post! Thanks. Did you try to use this in stock earnings (before/after)? What do you think. Thanks

 

[fluttrader]

Quote from dmo:



The ideal premium-neutral position is to be long the wings and short the middle. That way, if volatility goes up, you become long vegas and make money. If volatility goes down, you become short vegas and make money. Sounds strange but it's true. Try it and you'll see. It's one of the reasons for the classic "smile" of volatility. And if you get those 10-sigma moves, you'll make nothing but money.

How does the risk graph look like ?

 

[BeatingtheSP500]

Quote from dmo:


The ideal premium-neutral position is to be long the wings and short the middle. That way, if volatility goes up, you become long vegas and make money. If volatility goes down, you become short vegas and make money. Sounds strange but it's true. Try it and you'll see. It's one of the reasons for the classic "smile" of volatility. And if you get those 10-sigma moves, you'll make nothing but money.

You almost nailed what I am doing on the SPY. There are a few of twists though (how close to delta neutral, how close to premium neutral, etc). The main addition though is there are 2 months involved - Short the middle in the front month, and Long the wings in the back month.