How do holds work when selling naked options?

You can try selling naked options. The thing that mainly kills on this type of business is over leverage. You assume that after a few tries, you will win all the time, and start to play bigger than you are supposed to.

For example, let's say you have $10k on your account today, and your broker gives you 3x margin (so you can play up to 30k).

You start with 1 PUT with strike at 10, the stock is trading at 13, you sell it today, expiration is in 2 months, and you collect $200.

In the worse case scenario, the stock would drop to 0, you would lose $800. I must say this is very unlikely to happen, and the position will go against you for some time before dropping like this, so you will have time to EXIT.

The problem is that you, without experience, will not exit, and let it run against you more. That single position can almost eat 10% of your money.

Also, on the real world, you will not play with 1 contract, because you think it's too little, you will play with 20, and when it goes against you, the emotions will kick in. The margin calls will come. And then you'll hold it because you think it will reverse, but it won't, and then you will lose it and some more :)

There is money to be made selling options, but it is not easy and the R:R is not very good either, so look into other strategies that will give you better chance of surviving on the long run.

Quote from TWORIP:

fair enough, i did'nt want to start any tention, i think places like this are great for eachother, and again i appreciate all the replies. I have also learnt that listening to others and not looking into matter are a downfall too. it would be nice if someone could elaboration on the situations instead of just a short comment of how my paper trading plan is meaningless.
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Quote from TWORIP:

another post that is pointless and not constuctive. i am looking for criticism to see my flaws in a stratagy i made up, to help me. stuff like this is just another 2c blow.
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Just think of what can go wrong, not what can go right. Yeah, we all acknowledge you will win 70-80% or more of those trades (if done far OTM). But when you lose, it can easily be 5 - 20 times (or more) of what you made the previous month. Lots of supposedly savvy hedge funds and very experienced traders have been ruined by this. Read about Vic Neiderhoffer. He got blasted twice.

The thing is, stuff happens. How about a trading halt? No "rolling" then. I got caught in that after 9/11. How about 10-20% moves in one day? 30-40% in one month? Typically on the down side, but you can get nailed on the upside too. Limited trading access, shitty liquidity and horrid spreads, exploding IV...lots of things can trash your world.

Let's start with the basic rule "No Naked Options". Unless you do it unlevered and you just want to buy stock (naked puts only, NEVER SELL NAKED CALLS ON STOCKS). Even this can hurt you. Certainly, no naked ops on a monthly income strategy. Just not worth it.

So we do spreads. With experience, an extreme eye on risk and watching the markets very closely ALL the time, you may do all right with something like Condors. Too levered and done at the wrong time and this will sink you too. There is much info on ET about ICs.

Good trading.
 
Quote from TWORIP:

Thank you, i see what you are saying. So like a black swan event, would be an example right.
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There's a saying on the street that goes like this: Options sellers eat peanuts, but shit elephants.

All that implies is that it is a risky business. I personally don't sell options and instead buy them, based on where I think the underlying security will go. Less risk and the returns are just as good, depending on if you know what your doing or not.

I think that sometimes people that say others have failed doing it, your not unique, etc. etc. are right, but you should not allow yourself to be fooled by thinking it is impossible, it becomes very easy when you hear so many skilled people say it. Take risks, just take calculated risks. That's my advise.

If I was in your position, I would focus and hone my skills on KNOWING when your play GOES WRONG. Just for the fact that if you don't know what to look for, it will make your "roll out" harder (i.e. increasing your risk).

When it goes against you?
a.) What time frame?
b.) Emotional System (Checks)
c.) What kind of "losses" 15% is what you stated, but is it variable or set? If it's variable, what are the conditions? etc. etc.
Note: I've saved myself from getting killed several times in the options market because of what I "felt" was going to happen. Something not responding as I thought it would (not bouncing off resistance & hovering, etc.) So...it equated to not taking a loss at all, but would have if I didn't get out prior (pre-guessing).

I could go on and on for a larger checklist, but my point is: Get a defined system down, and only change it when there's proof that it doesn't seem to work right..

Edit: Good luck and I hope you can keep us all updated as to your path and results.
 
Quote from TWORIP:

i would roll as strike hits and no later. i would roll out and down while reducing contracts just to eliminate cost with the added premium. on paper worst case, it is rolled 6 - 9 months out. this is not to mention the top would offset the losses on bottom (selling puts and calls same time).

example: spy, rolled jan80 to april 70 and reduce from the 10 contracts to say 8 as to not add cost. also with that big of a drop, it will turn and deter quick.

what do you think?
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A lot of good stuff has already been said so I'm not gonna repeat it.

However, here's a crack at your example, what happens when the SPY goes down to 82 or 81, which doesn't yet trigger your roll, and then gaps down 10 points on the open? All of a sudden, your 80 put is 8-9 pts ITM!
 
Quote from TWORIP:

another post that is pointless and not constuctive. i am looking for criticism to see my flaws in a stratagy i made up, to help me. stuff like this is just another 2c blow.
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Try lightening up a bit TWORIP. The Amazon link to the bankruptcy book was a hoot. Try to see the humor in life (and posts), particularly on a public BB.

As for your many questions, you've gotten some really good explanations so I'm just going back to the Peanut Gallery :)
 
So the two cracks at my startegy were:

A. SPY goes way down then gaps down 10 points by the following morning.

B. SPY dives 20% in 1 day.

C. Leveraged too far.

A -
First off i have never seen the SPY gap 10 points in 1 night, and i don't think it ever has. What stock at all has ever done that??

B -
Again I don't think the SPY has ever lost 20% in a single day ever.

Now even if one of those 2 events DID occur(which is about as likley as me being stuck by lightning) you forget, the top would help to offset the bottom(all naked calls would be ITM) and along with rolling it out far enough, i bet i could ATLEAST still get to zero, if not, still make a penny or 2. Also if stock dropped 20% in one day, keep in mind, i ALWAYS roll on stike and never later, and i am very disiplined about this. So it is still limited risk.

C -
I trade unleveraged.

Any more unrealistic cracks at my strategy?
I'll be waiting....

Anyone that's actually had the experiance of trying this strategy and losing their ass?? Or is all this negativity from inexperianced he said, she said traders?
 
Quote from spindr0:

Try lightening up a bit TWORIP. The Amazon link to the bankruptcy book was a hoot. Try to see the humor in life (and posts), particularly on a public BB.

As for your many questions, you've gotten some really good explanations so I'm just going back to the Peanut Gallery :)
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Oh and I am fine, just trying to keep the peanut gallery people out my thread so they can refrain from giving me peanut answers.
 
Quote from TWORIP:

First off i have never seen the SPY gap 10 points in 1 night, and i don't think it ever has. What stock at all has ever done that??
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Plenty of them.

Have you ever seen what happens when a buyout is announced?

Have you even seen what happens when a biotech stock gets an unfavorable comment from the FDA?

Have you ever noticed what happens to GOOG shares after an earnings surprise?

SPY is another story, but that's not what you asked.

Trading leveraged from the sell side is simply not a smart thing to do. But the rewards are fantastic while they last.

Mark
 
At the top i meant that the spy or qqqq which is what i trade in my strategy has never gapped that big ever.

One guy also said that i am locking losses on a roll. What you forgot is that i am reducing contracts as i roll which reduces obligation.

Millions of people trade covered calls as a concervative plays. A covered call is a synthetic naked put.

I could also throw a ratio or spread in there to limit risk if it were losing ground to quickly.
 
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