Are naked puts really this safe????

[atticus]

Crash n burn/Jahajee hedges $8k in garbage puts with big SP futures. It's utterly moronic and serves no purpose other than to make the hedge the primary trade. You have to be a special breed of stupid to attempt it.

He sold 20 SPX Oct par puts at 3.85 and hedged with one SPU8 [Sep hedge?]. The premium represents <31 points in the big SP.

http://www.elitetrader.com/vb/showthread.php?s=&postid=2069874#post2069874

 

[kinggyppo]

Quote from RedDuke:

Hello,

I have a question about naked options, in this particular case – naked puts. I pretty much know nothing about options besides general terminology. I attended a meeting for capital raising for 1 small fund (around 10mil under management). The only thing they trade is options on S&P 500.

The manager said that they utilize various strategies which are very safe and depend on market conditions. The only danger, according to him was the leverage they employing, but let’s set this one aside for now. When I asked him about how they trade, he said that right now they basically sell out of the money naked puts. I immediately asked about the danger of such strategy, we all heard many stories about people loosing everything by trading this way. This is what he said:

They are not risky because you can always cover the one that you sold and sell the following month thus not having a loss. Basically he would sell October Put for $2 and if the price would approach the strike, he would buy back this put for 3 and immediately sell November Put for 3 and thus protecting himself. He did not loose anything except for commissions. It seems like average down, but since this is index it is not as volatile as stock.

What do you guys think? It just sounds weirdly simple. Can you please share your insights.

Thanks,
redduke

As one poster said this rolling forward is like doubling down. It works great till, well the spuz drop 100 points in week. I would love to see their p & l at the end of the month.

 

[Wayne Gibbous]

Quote from IV_Trader:

so , what is the answer for OP's question ? Is it (safe) ?

Is it safe?

Ask Jahajee the "Marathon" put seller...

 

[dagnyt]

Quote from JSHINV:

I haven't been on ET in a couple of weeks. But, in light of today's events, I thought I'd stop by this thread. I was wondering are those who were proponents of naked put sales, are you still proponents? Or even covered calls or cash secured puts? Don't get me wrong I love options. Use them all the time to hedge the underlying. Which for a trader like me they are best used for. Oh, I know what popular literature says, that covered calls are hedges. Not in my book.

1) You should try a new BOOK

2) A covered call is exactly equivalent to a cash-secured naked put, when the strike prices and expiration date are the same.

3) Naked put sales (cash-secured or otherwise) are still okay. But they should be used ONLY by investors who WANT to accumulate stocks at prices lower than current.

Traders should exercise due caution by selling put spreads, rather than naked puts. (Or call spreads, rather than naked calls.) The added safety is worth accepting a reduced profit potential.

Mark
http://blog.mdwoptions.com/options_for_rookies/

 

[makloda]

Quote from Wayne Gibbous:

Is it safe?

Ask Jahajee the "Marathon" put seller...

HAHAHA Good one, one of my all time favorite movie scenes. "Is it safe?" "What?"

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[El OchoCinco]

Quote from JSHINV:

Oh, I know what popular literature says, that covered calls are hedges. Not in my book.

Well, hedges in the sense of trying to catch a falling elephant with a napkin...

 

[dagnyt]

Quote from optioncoach:

Well, hedges in the sense of trying to catch a falling elephant with a napkin...

Hi Coach,

No one ever said that writing covered calls was a complete hedge.

But it does fit the definition of a hedge. Writing the call partially offsets the risk of holding another position.

Obviously it's minor protection, but for an individual investor who is first learning about options, I believe it's a good <i>introduction</i> to learning how to use options to hedge a position.

Mark

 

[paysense]

Quote from RedDuke:

"Are naked puts really this safe????"

No.

 

[man]

the game is: gather enough money to open shop. sell
OTM puts and cash in fees. after 6, 12, 24 months you will
eventually lose all client money. then gather enough
money to open shop ...

i am afraid it is that simple.

 

[JSHINV]

Well your post is exactly what the popular literature I was refering to says. Still they are not good hedges in my book.

Quote from dagnyt:

1) You should try a new BOOK

2) A covered call is exactly equivalent to a cash-secured naked put, when the strike prices and expiration date are the same.

3) Naked put sales (cash-secured or otherwise) are still okay. But they should be used ONLY by investors who WANT to accumulate stocks at prices lower than current.

Traders should exercise due caution by selling put spreads, rather than naked puts. (Or call spreads, rather than naked calls.) The added safety is worth accepting a reduced profit potential.

Mark
http://blog.mdwoptions.com/options_for_rookies/