Are naked puts really this safe????

I don't write naked puts. However, I do short stocks and write puts against the short stock. This combination is a "covered put write". It is synthetic to a naked call write.

I don't have a problem with this synthetic naked call write. I don't need a stock that is going to go down. I make just as much on a sideways move as I do on a downward move of the underlying.

This thing about limited reward is not entirely accurate. Reason is that I can always adjust my short put position. I try to keep it at the money because that is where the extrinsic value is always greatest. And I love to get assigned early on my put writes. Reason is that the assignment closes my short stock position and I realize the full amount of the theta amortization.

Over the past few months this strategy has produced a surprise benefit. That benefit relates to the incredibly high volitility, which is reflected in the nice premiums I have been able to get.

4Q
 
Quote from exQQQQseme:

I don't write naked puts. However, I do short stocks and write puts against the short stock. This combination is a "covered put write". It is synthetic to a naked call write.
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The naked call (synthetic version or not) has been working well because the market has been declining.it's a bear market

Don't get too overconfident. I remember all the bull market geniuses who were earning great profits by selliing naked puts in a bull market.

I'm NOT predicting this will end any time soon, but it will end some day. No strategy works forever.

Mark
 
Dagny, this strategy doesn't require a bear market in order to work...although it certainly does help. It works very well in a sideways market also, Mark, you're right about no strategy working forever. But none of us live forever either. I'm 70 and enjoying good health. This financial mess might indeed outlast my lifetime. I don't see the markets ever returning to the boom days of the 1990's. Even if I'm wrong (as we all are from time to time), I always have #4 below to fall back on.

A few additional pointers:

1. I don't necessarily need a stock which is going to go down. Just one which is not going to go up significantly over the next few months.

2. In connection with #1, I stay away from pharmaceuticals.

3. Even good stocks, when coming out of a bad market, will not immediately go up quickly. Profit taking comes into play.

4. I can always buy cheap insurance with a high copay by purchasing very cheap deep OTM calls. While my short puts are always current month (or next month with less than a week to go), my long call protection is generally 2 to 3 months out. That way, since I almost always loose the entire premium paid for the call, I mentally amortize the cost premium over the entire number of days left in the options. It's a miniscule amount per day on a straight line basis.

5. Looking at financial statements and other available fundamental information, it's not at all difficult to see a company in trouble. For the past year I have been telling anyone who would listen that GM had no chance. For the past 6 months or so, its current liabilities exceeded its current assets, and its stockholder net worth was less than zero. That one is a no brainer. In connection with GM, I have no opinion on a Federal bail out. But, whether they do or not, the demise of GM is inevitable. Even if the company does not file for Bankruptcy, there is nothing preventing the creditors from petitioning the Court for an involuntary Bankruptcy.

6. Finally, on those stocks where I currently have this strategy in place, on those occasions where the company does go up, I increase my position in a modest amount. It is kind of like dynamic hedging in reverse.
 
Covered calls (synthetic naked puts) or the selling puts against short stock (synthetic naked calls), just not the kind of risk I want to take in any market. Don't want to debate it though, just expressing my preference - saying this because some will come back at me, saying how they have the risk managed. Maybe you do. I just choose not to do it.
 
JSHINV, thank you for your comments. I very much appreciate your expression of concern. Last thing I want to do is influance anyone into a trading or investment decision.

This strategy is what I do and what has worked very well for me. I felt like sharing and providing some details for the benifit of anyone who might be interested.

Good luck in your trading.

4Q
 
RedDuke

Can you provide an update on the fund's performance?

Thanks.

Quote from RedDuke:

They are 100% up for the year. Do you mind explaining how they can get wiped out assuming they are not going to repeat it indefinitely if market seriously goes down.

Thanks,
redduke
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Quote from pcvix:

RedDuke

Can you provide an update on the fund's performance?

Thanks.
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The update is on the bottom of page 85:

"10-10-08 04:33 PM

I just got update on the fund.

Unfortunately for their investors, they went bust. This week they realized 85% loss from the top of their assets.

The thing that amazed me, is that some investors took out large loans and dipped heavily into their home equity line of credit to invest. The biggest capital infusion happened this year, because of fund earlier stellar performance, and thus the losses are huge for them.

redduke"
 
I read the first few replies before realizing this thread was started back in August 08. That fund mentioned in the OP sold naked puts right into the collapse of Lehman ouch. Somehow I doubt they were selling cash secured puts either. I mean their entire exit strategy was to roll to the next month. Idiots like that shouldn't be allowed near other people's money. Then again which was the bigger fool, them or their investors?
 
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