Are naked puts really this safe????

[riskfreetrading]

Quote from Emilio_Lizardo:

Vomma? Man, you quant guys are way beyond me.

DMO, MAW/RFT is not a quant. He doesn't even trade. He is a fake quant like Maestro except that he knows how to cut and paste from Wikipedia, Investopedia, and other sources. However he has no real understanding of what he is posting. [/QUOTE]

I do not know what the definition of a quant is. So it is entirely possible/probable that I am not quant. As for the rest of your comments,....

PS: Qhy lizardo as a name? It reminds me a small reptile laying on an old wall or on a field of cactus in the south, to get some sun, but run if sensing any human coming by. Run, run, run, ...

 

[Nagarjuna]

Assuming: EMH is true and the underlying is random; isn't the EV of every option trade essentially zero (not taking commissions and slippage into account, after which the EV is negative)?

So selling a put is no more riskier than buying a call. Buying calls results if lots of small losses perfectly offset by a few large gains. And selling puts results in lots of small gains perfectly offset by a few large losses. At least this is what EMH theory states.

Sure with leverage, selling puts can blow up a trader - but buying calls can also blow up a trader even more easily since you have access to a lot more leverage with calls.

 

[dmo]

Quote from Nagarjuna:

Assuming: EMH is true and the underlying is random; isn't the EV of every option trade essentially zero (not taking commissions and slippage into account, after which the EV is negative)?

So selling a put is no more riskier than buying a call. Buying calls results if lots of small losses perfectly offset by a few large gains. And selling puts results in lots of small gains perfectly offset by a few large losses. At least this is what EMH theory states.

Sure with leverage, selling puts can blow up a trader - but buying calls can also blow up a trader even more easily since you have access to a lot more leverage with calls.

Well if EMH is true then we might as well all go home and do something else. There's no point trading a market that's perfectly efficient.

In my experience those who believe EMH have never made a living in the markets, and those who HAVE made a living in the markets think EMH is silly. What does that tell you?

 

[BeatingtheSP500]

The markets are MOSTLY efficient.
I like the term unpredictable vs random. If they were truly random the returns on any scale would resemble more of a bell curve, which they don't. I suppose the term irrational could also be substituted. JMO

 

[short&naked]

Quote from BeatingtheSP500:

Selling naked puts can work for while, but you don't get something for nothing. There will be a time when those on the other side of that trade will have their due. If there is no leverage, then that's a different animal.

Please elaborate on leverage making a difference. Aren't the blow up risks the same, regardless of leverage?

 

[Nagarjuna]

Quote from dmo:

Well if EMH is true then we might as well all go home and do something else. There's no point trading a market that's perfectly efficient.

In my experience those who believe EMH have never made a living in the markets, and those who HAVE made a living in the markets think EMH is silly. What does that tell you?

There are many quant funds assuming an EMH/random underlying in their models and make a ton of money. And there are many funds that don't have that assumption and make a ton of money. But lets put that argument aside for now.

My main point is that the theoretical EV of an option purchase or sale is 0. But many option sellers wrongly assume that selling options gives them a time decay "edge". And there are many option buyers that wrongly assume that buying options is safer than selling of options. Buying options isn't any safer than selling them (naked or otherwise) and collecting premiums isn't an "edge."

 

[JSHINV]

If you can't meet a margin call the broker will begin liquidating as fast as they can, any assets in your account until its met. And if that doesn't meet the call, they'll stop you from trading. Happens all the time. Happens to small retail traders. Happens to profesional traders managing hundreds of millions (less frequently but makes the front pages).

Quote from short&naked:

Please elaborate on leverage making a difference. Aren't the blow up risks the same, regardless of leverage?

 

[short&naked]

Quote from JSHINV:

If you can't meet a margin call the broker will begin liquidating as fast as they can, any assets in your account until its met. And if that doesn't meet the call, they'll stop you from trading. Happens all the time. Happens to small retail traders. Happens to profesional traders managing hundreds of millions (less frequently but makes the front pages).

Not sure that answers the question, but you are right.

 

[BeatingtheSP500]

Quote from short&naked:

Please elaborate on leverage making a difference. Aren't the blow up risks the same, regardless of leverage?

The risks are ALL about leverage. There is a huge difference between selling 1 month ATM puts on the SPY consecutively and rolling, with cash to back the possible assignment. That is a valid strategy. That's a whole lot different than capturing the same $ premium by selling OTM puts, shorting gamma, which will eventually kill you. If there is $10 ATM for 1 contract and you fully backed for that one contract, it's VERY different than selling 10 contracts x $1 OTM, even though the juice is the same.

 

[JSHINV]

The risk of not being able to meet a margin call in an account that is leveraged, I think is fairly substantial over an account that is not leveraged and does not have that risk - especially when you are short premimum and don't have the cash to back it up. Actually in both scenarios you're probably screwed. But, to not meet a margin call, you're really screwed.

Quote from short&naked:

Not sure that answers the question, but you are right.