Usually, I sell covered calls of stocks. Also, secured puts. I know very well that selling naked calls is the riskiest strategy. But here's a thought. What if I sell a call option and place an order to buy x100 shares just below the strike price to cover the position before running into a loss? Example: sell SPG Apr19'24 150 Call for 3.50$, place a buy order x100 shares if the price reaches 149. Thus, if the price doesn't reach too close to the strike price, the option will expire worthless. If the price of the underlying goes up close to the strike price, the position will be covered. If the price at expiration is above 150, the total gain would be close to 450$. The only negative is if the price moves down significantly after the buy order is fulfilled. Thanks for any constructive comments and advice.
Covering naked call options
- Thread starter spyro65
- Start date
Robert Morse
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You would have to back test what percentage of the time, that works over saying if my OTM call goes ATM, cover. I do not sell naked calls but I'd rather cover the loss than increase my risk on the trade where the stock can turn around and you lose twice.
Thanks, I understand your reasoning. I do not intend to make this my mode of operating, but I think it is a viable strategy in certain situations, with the thought of making a buck without the initial outlay for the underlying. Especially on stocks I don't mind owning for a certain period. I posted cos I thought someone might point me to a detail I'm missing. Also, I was a bit puzzled that I hadn't come across someone talking about such a strategy. I am curious about what would be your reading for the mirror- side of the wheel strategy - when selling a put that didn't go your way, would you rather cut your losses and move to the next trade or you would rather rollout in time with the new premium (ideally) offsetting the loss from the initial put. And if you are to roll out, what % of the loss from underlying would trigger the action? Of course, we agree that each option trade is unique, and different factors may influence the decision.
This question has been asked many times. No change in expected value but obscene change in variance of returns.
Robert Morse
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Your initial post was about naked short calls. Now you are asking about naked short puts. You need an exit plan for both. Rolling a losing trade or putting a hedge never make sense to me when the trade went bad. And the idea that if a stock is trading at 100, and I sell the 85 puts, that I would love to get assigned so I can buy that stock down 15%, well, it is not the same stock down 15%. Either market conditions have changed or something material changed in the stock. You have no idea in advance what you might want to do. You sell naked options when you have a high expectation they will expire OTM. IMO, you take losses when they don't and move on.
Interesting...maybe have an OTS order where if your long 149 buy gets filled it will cancel the 150 call, and sell a 155 call so you get more premium and more of the upside. Also, with the long buy order, the position is covered but only intraday, so not sure about margin requirements. Isn't this a synthetic long vertical spread?
You don't have anymore downside risk than you would just buying shares or using the regular wheel strategy, but you would be getting more premium and more importantly more upside, which is the Achilles heel of the wheel.
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The way I see it, if you are ever about to hit the "buy" button for any shares, you'd be better off selling a put for premium and getting filled at an even lower price. Same with when you are about to hit the "sell" button, you'd be better off selling a call for premium, and getting filled at an even higher price.
Robert Morse
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There are circumstances where I prefer to sell the just OTM put. But I only do that because I like to stock but neutral over the short term. If I want to be long, I want to make more than the value of the short put.
Robert Morse
Sponsor
I portfolio of those might do well, but you still need to have the expectation that the stock will not move much or quickly. If I take the time and effort to pick a small number of stocks I think will do much better than the market, I do not want my upside capped as I need to make up for the times I'm wrong. I did a lot of ratio spreads when I was a MM. 1X3, 1x2 but it was always with a view on VOL being too high, not random, and not on stocks that were directional bets.