Do most option writers hedge thier writes, or do you just take a chance?

Quote from riskarb:

It's identical to selling 100 shares. Collars have convergence risk, but smaller deltas. You'll do better on the synthetic short if correct on direction.
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Thanks I've been reviewing this after your post and it is a much better trade then what I was doing.

Mucho Appreciated :)
 
Quote from a529612:

Are you talking about naked write? I think the pros write options at really far out "fantasy" strikes and the odds are on their side.
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Collecting $0.05 isn't worth the risk. One bad trade in 50 could wipe out all those nickles.
 
Quote from LeonPhelps:

Guy, why hedge your bets? 85% of all options expire worthless! How you gonna beat them odds?
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I think the actual statistic, and I don't have a cite for it at the moment, is that 80% of the options held at expiration expire worthless. Most options that have some value are exercised/assigned/closed out before then.
 
Quote from loufah:

I think the actual statistic, and I don't have a cite for it at the moment, is that 80% of the options held at expiration expire worthless. Most options that have some value are exercised/assigned/closed out before then.
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My educated guess is that 50% of options expire worthless - the OTM options. And 100% of all options lose time value, that's how the option writer makes money on the lost time value. Intrinsic value will either cause a loss or additional gain.
 
What sorts of margin requirements are needed for writting naked puts/calls for say ER2?

IB says, for Short Naked put:

100% * option market value + maximum (((20% * (underlying market value) - out of the money amount), 10% * strike price, $2.50 * multiplier * number of contracts). 20% above is 15% for broad based index options. Short sale proceeds are applied to cash.
Same rules as cash for IRA Margin Accounts.

Can someone please explain the above to me? I mean if ER2 is being traded right now at 700, and I want to write 670P for July, which has premium of 7.10, what would be the margin requirement? Say I have 100K in my margin account with Option level 4 clearance, how many contracts of 670P can I write?

This is just hypothetical, I'm not really gonna do it, just need to understand it.

Thanks for all your help (or flame, if it should come my way ;-))
 
Am wondering if anyone can recommend any text where I can learn more about writing versus buying options in low vol/high vol enironments.

Basically, my issue is that Marc Fisher's ACD method works superbly in hig vol environments - not so much in low vol/consolidation periods.

I'd like to learn more about adding to my trading of the actual underlying with buys of OTM puts and calls when vols are low and selling them when vols are high.

Thanks in advance for your tolerance of my naive approach to options - I'm quite new to them.
 
Quote from riskarb:

You can sell 100 short via the synthetic:

Short 1 100 call
Long 1 100 put

Of course it will involve some edge loss.
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Many of the hard to borrow stocks have huge options spreads. I can't see how they would hedge under those conditions using options. Some edge loss? Looks like all edge loss from here.

Can't MM's short stock easier than retail?
 
Quote from PatelAtWork:

What sorts of margin requirements are needed for writting naked puts/calls for say ER2?

IB says, for Short Naked put:

100% * option market value + maximum (((20% * (underlying market value) - out of the money amount), 10% * strike price, $2.50 * multiplier * number of contracts). 20% above is 15% for broad based index options. Short sale proceeds are applied to cash.
Same rules as cash for IRA Margin Accounts.

Can someone please explain the above to me? I mean if ER2 is being traded right now at 700, and I want to write 670P for July, which has premium of 7.10, what would be the margin requirement? Say I have 100K in my margin account with Option level 4 clearance, how many contracts of 670P can I write?

This is just hypothetical, I'm not really gonna do it, just need to understand it.

Thanks for all your help (or flame, if it should come my way ;-))
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Hi patel,

First i am from Canada ( so maybe regulation ARE different , used to be a option- equity trader for a retail firm ).

for stocks not ER2 ( using your 20% ....stocks are 25%)

stock is 700$

you want to short a 670$ put with a 7.00

quick calculation: multiply stock price by 20%

700$x20% = 140$

USE THE 140$ MINUS THE otm PORTION (IN YOUR CASE 30$ FOR A 670$ PUT)
SO 140-30= 110$
WOULD BE THE MARGIN FOR STOCKS
1 CONTRACT WOULD TIED UP 11000$ MARGIN
WITH 100K YOU COULD WRITE 9 CONTRACTS


p.S FOR THE SAME MARGIN YOU COULD ALSO WRITE 9 CALLS AT A STRIKE OF 730$ ( ALONE OR SELLING THE STRANGLE(SHORT 9 670 PUT AND SHORT 9 730 CALL) AND THAT WOULD BE THE SAME MARGIN
 
Quote from RICKTHESTICK:

Hi patel,

First i am from Canada ( so maybe regulation ARE different , used to be a option- equity trader for a retail firm ).

for stocks not ER2 ( using your 20% ....stocks are 25%)

stock is 700$

you want to short a 670$ put with a 7.00

quick calculation: multiply stock price by 20%

700$x20% = 140$

USE THE 140$ MINUS THE otm PORTION (IN YOUR CASE 30$ FOR A 670$ PUT)
SO 140-30= 110$
WOULD BE THE MARGIN FOR STOCKS
1 CONTRACT WOULD TIED UP 11000$ MARGIN
WITH 100K YOU COULD WRITE 9 CONTRACTS


p.S FOR THE SAME MARGIN YOU COULD ALSO WRITE 9 CALLS AT A STRIKE OF 730$ ( ALONE OR SELLING THE STRANGLE(SHORT 9 670 PUT AND SHORT 9 730 CALL) AND THAT WOULD BE THE SAME MARGIN
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My CALCULATION ARE WRONG FOR FUTURES ( YOU CAN GO LONG MORE THEN 9 CONTRACTS OF ER2 OUTRIGHT OVERNIGHT AND SELLING A OTM PUT IS LESS RISKY THEN BEING LONG CASH SO JUST USE THE FORMULA FOR STOCKS )

P.S IF YOU ARE SELLING DEEP DEEP otm CONTRACTS THE rule of thumb would be 5% of the underlying as margin requirement
 
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