how come you would write a put rather than buy a call?
- Thread starter IronFist
- Start date
My father taught me to trade options when I was a teenager, in the mid 1980s.
He taught me to think of a naked put as having unlimited risk. This is not mathematically accurate, and my dad certainly understood this. (He was a member of the Chicago Board Options Exchange.)
But I can see why some people may think of it this way. A cash-secured short put has a clearly defined maximum loss. Some might say that a cash-secured short put is not a naked put, because it is covered with sufficient cash to buy the stock if you are assigned. But it is still naked in the sense that it is not covered or hedged by a long put.
A true naked put is not covered by cash. It is sold subject to the broker's margin requirement, which in a Schwab retail account, for a naked short equity put, is
Greater of:
• 20% underlying value
– out of the money
amount + premium
• 10% underlying value
plus premium
• $100 per contract
I can see why some might think of this as unlimited risk. It is not mathematically unlimited, but it is unlimited in a different, more abstract way. If it goes against you, in a worst-case scenario, it can blow out your account. The risk is unlimited in the sense that it may expose you to a risk that could put a permanent end to your trading.
BMK
He taught me to think of a naked put as having unlimited risk. This is not mathematically accurate, and my dad certainly understood this. (He was a member of the Chicago Board Options Exchange.)
But I can see why some people may think of it this way. A cash-secured short put has a clearly defined maximum loss. Some might say that a cash-secured short put is not a naked put, because it is covered with sufficient cash to buy the stock if you are assigned. But it is still naked in the sense that it is not covered or hedged by a long put.
A true naked put is not covered by cash. It is sold subject to the broker's margin requirement, which in a Schwab retail account, for a naked short equity put, is
Greater of:
• 20% underlying value
– out of the money
amount + premium
• 10% underlying value
plus premium
• $100 per contract
I can see why some might think of this as unlimited risk. It is not mathematically unlimited, but it is unlimited in a different, more abstract way. If it goes against you, in a worst-case scenario, it can blow out your account. The risk is unlimited in the sense that it may expose you to a risk that could put a permanent end to your trading.
BMK
Last edited:
You only blow out with leverage...
Run simulations,and you will see very clearly the risk of naked put vs long call..Its the max drawdown
on the naked put that is a crusher..
Keep in mind the peak to trough drawdowns on long call a is no picnic either..
There is no inherent mathematical edge to buying a call vs selling a put..
Run simulations,and you will see very clearly the risk of naked put vs long call..Its the max drawdown
on the naked put that is a crusher..
Keep in mind the peak to trough drawdowns on long call a is no picnic either..
There is no inherent mathematical edge to buying a call vs selling a put..
You sleep better at night knowing your maximum loss.