How do holds work when selling naked options?

[dagnyt]

Quote from TWORIP:

First off i have been trading this strategy averaging 5% or more per month through one of the worst markets ever


Oh and please do point out the main pitfall in my strategy, i must of missed it while i was covering all the other ridiculous scenarios...and i did cover them.
I'll wait....

I know you are going to ignore all the advice of those of us who have been through this and who are more experienced than you, but

1) 'One of the worst markets ever' is not relevant. Your results depend on which options you sell. Obviously selling calls works during bear markets.

2) Rolling is not always available to you at prices you will be willing to pay.

3) Rolling is not the panacea that it appears to rookies who have never seen the situation in which they had to roll a 2nd or 3rd time over a very short period of time.

4) Reducing potential profits by buying further OTM options as protection is necessary for long-term survival.

5) No one was more stubborn than I when it came to ignoring advice. And I'm telling you from the perspective of someone who used to be naked short more than 1,000 naked calls and or puts at the same time that this strategy works often. But not often enough to compensate for the times when it doesn't.

Cockiness and self confidence only protects you to a point. The markets know more than you do.

Good luck,

Mark
http://blog.mdwoptions.com/options_for_rookies/

2) You are wasting comimssion dol

 

[sirziggy]

Well, I have been reading all of this and find it very interesting.

Let's use a 100k portfolio and tworip sells 1k c and p and let's say he makes 1.25 on ea side of the trade playing the 72p and 90c. That gives him over 10% on each side.

What's the real risk? Let's see

1. Stock goes to zero, he would lose 72k minus the 2500 he brough in from selling the positions. This won't happen. I'll say, if the nasdaq or s&p go to zero, we have a lot more trouble then 72k in losses since the dollar would be worthless and the world economy as we know it would ceas to exist.
2. Per the 20% example, depending on current price of ETF, I'll use the strike at 72, that would leave a loss of roughyly 14k. Of course, we still brough in 2500 so losses of 11.5k.
3. Stock stays above 72 so he keeps the 2500.

Calls.
1. stock goes to 1000, he'd be screwed, this isn't going to happen either. I can get flamed all you want, but there is no way the spy or the qqq's are going to jump 500% in 4 weeks or less.
2. Using 20% increase again, stock jumps to 108, losses of 18k minus the 2500 or 15.5k.
3. Stock stay under 90 and above 72, he keeps all his money.

As long as he isn't leveraged, the chances of him getting burned badly are slim. yes, he could take a 10-15% hit, but if he can afford to ride that out, then the strategy is pretty solid. Many have lost 40% or more this year, so we are all always at great risk.

I think the basis for success are don't get greedy, and make sure you give yourself enough cushion on either side of the sell. If you bring the strikes in to close, things could go against you much more often for alittle bit more income.

As far as the rolls, the spy and qqq's are very liquid and have plenty of options as far as strikes and months. I say be careful and you'll probably do fine. Chances of a 20% day are pretty slim, but it would show that even in that, you could still manage a reasonable loss.

I'd like to see the longs on a 20% down day, or the shorts on a 20% up day. At the end of the day, in a crazy market that would make that sort of move, we'd all lose some.

 

[TWORIP]

Quote from sirziggy:

Well, I have been reading all of this and find it very interesting.

Let's use a 100k portfolio and tworip sells 1k c and p and let's say he makes 1.25 on ea side of the trade playing the 72p and 90c. That gives him over 10% on each side.

What's the real risk? Let's see

1. Stock goes to zero, he would lose 72k minus the 2500 he brough in from selling the positions. This won't happen. I'll say, if the nasdaq or s&p go to zero, we have a lot more trouble then 72k in losses since the dollar would be worthless and the world economy as we know it would ceas to exist.
2. Per the 20% example, depending on current price of ETF, I'll use the strike at 72, that would leave a loss of roughyly 14k. Of course, we still brough in 2500 so losses of 11.5k.
3. Stock stays above 72 so he keeps the 2500.

Calls.
1. stock goes to 1000, he'd be screwed, this isn't going to happen either. I can get flamed all you want, but there is no way the spy or the qqq's are going to jump 500% in 4 weeks or less.
2. Using 20% increase again, stock jumps to 108, losses of 18k minus the 2500 or 15.5k.
3. Stock stay under 90 and above 72, he keeps all his money.

As long as he isn't leveraged, the chances of him getting burned badly are slim. yes, he could take a 10-15% hit, but if he can afford to ride that out, then the strategy is pretty solid. Many have lost 40% or more this year, so we are all always at great risk.

I think the basis for success are don't get greedy, and make sure you give yourself enough cushion on either side of the sell. If you bring the strikes in to close, things could go against you much more often for alittle bit more income.

As far as the rolls, the spy and qqq's are very liquid and have plenty of options as far as strikes and months. I say be careful and you'll probably do fine. Chances of a 20% day are pretty slim, but it would show that even in that, you could still manage a reasonable loss.

I'd like to see the longs on a 20% down day, or the shorts on a 20% up day. At the end of the day, in a crazy market that would make that sort of move, we'd all lose some.

Woah! Couldn't have put it better or come up with better scenarios myself. kuddos Sirziggy!

 

[dagnyt]

Quote from sirziggy:

Well, I have been reading all of this and find it very interesting.

You ignore some basics.

1) You can lose money . The market does not have to move 20%. to lose money.

2) You look at 10% on each side as if the only thing to do is to carry the trade all the way to expiration. Guarantee that's a death wish. Let someone else have the last few nickels on the trade.

3) The fear factor. If the market moves and the strike price becomes ATM, some decide to hold and hope for the best. Prudent traders know enough to get out of the risky trade.

4) Rolling is not a simple solution just because the strikes exist. Sometimes the prices are horrible and the rolled position is so poor that the trader would not want to own it.

5) Most people who believe selling naked options is the road to riches feel so confident that they do not roll or close. They hold and hope.

6) Hope is not a strategy.

7) Selling the options is a high probability game. You probably win most of the time. In fact, today's markets are so good for those who have been selling premium that they have already forgotten the lessons of 2008.

8) Naked put selling is a good strategy - but ONLY for investors who want to accumulate stock.

9) Naked cal selling is too risky for most and many brokers will not allow their customers to sell naked calls.

10) Overconfidence is a killer. A killer.

Mark

 

[TWORIP]

Quote from dagnyt:

I know you are going to ignore all the advice of those of us who have been through this and who are more experienced than you, but

1) 'One of the worst markets ever' is not relevant. Your results depend on which options you sell. Obviously selling calls works during bear markets.

2) Rolling is not always available to you at prices you will be willing to pay.

3) Rolling is not the panacea that it appears to rookies who have never seen the situation in which they had to roll a 2nd or 3rd time over a very short period of time.

4) Reducing potential profits by buying further OTM options as protection is necessary for long-term survival.

5) No one was more stubborn than I when it came to ignoring advice. And I'm telling you from the perspective of someone who used to be naked short more than 1,000 naked calls and or puts at the same time that this strategy works often. But not often enough to compensate for the times when it doesn't.

Cockiness and self confidence only protects you to a point. The markets know more than you do.

Good luck,

Mark
http://blog.mdwoptions.com/options_for_rookies/

2) You are wasting comimssion dol

Dol,

looks like sirziggy answered your post for me dol.

Oh and dol, please do tell us about what you were doing and what happened in YOUR blowout when you were trading these 1000 naked puts and calls dol?

Just playing catchup here dol, let me get to your next post dol.

 

[piezoe]

Some interesting ideas here, Tworip. As one who, nowadays, acquires stock by selling puts whenever i can, but always cash secured, I am interested in your strategy of selling calls simultaneously. I'm going to do some thinking and calculations on my own, and come to my own conclusions. The constructive comments of cfelicio and ziggy were helpful.

But, Tworip, i'm a little confused by the idea of selling calls "naked" without margin. No problem with puts of course because the maximum risk is defined and the obligation can be secured with a fixed amount of cash.
But in the case of short calls, when you say you don't use margin, do you mean that if the underlying rises to the short call strike price that you will roll the call up and out to keep the underlying below the short calls strike price?

To someone who said "rolling locks in a loss" I would say: "well, it certainly could." But other outcomes are also possible. For example, rolling can reduce one's potential gain in exchange for reduced risk. And there are of course other possibilities too, depending on when and to where one rolls and subsequent events. So i think it is a little too simplistic and perhaps misleading to flat out state that "rolling locks in a loss."

 

[TWORIP]

Quote from dagnyt:

You ignore some basics.

1) You can lose money . The market does not have to move 20%. to lose money.

2) You look at 10% on each side as if the only thing to do is to carry the trade all the way to expiration. Guarantee that's a death wish. Let someone else have the last few nickels on the trade.

3) The fear factor. If the market moves and the strike price becomes ATM, some decide to hold and hope for the best. Prudent traders know enough to get out of the risky trade.

4) Rolling is not a simple solution just because the strikes exist. Sometimes the prices are horrible and the rolled position is so poor that the trader would not want to own it.

5) Most people who believe selling naked options is the road to riches feel so confident that they do not roll or close. They hold and hope.

6) Hope is not a strategy.

7) Selling the options is a high probability game. You probably win most of the time. In fact, today's markets are so good for those who have been selling premium that they have already forgotten the lessons of 2008.

8) Naked put selling is a good strategy - but ONLY for investors who want to accumulate stock.

9) Naked cal selling is too risky for most and many brokers will not allow their customers to sell naked calls.

10) Overconfidence is a killer. A killer.

Mark

1) On those few times that i do lose(very few times as you stated) i am
able to survive the storm at 20% loss(an extreme that is likely to never happen in the spy and qqqq and never has) as shown to you and i am sure i
would be able to do it on anything less than 20% as well.

2) Been doing exactly that, no problem so far, please elaborate on
why this would be a death wish. General discription as "death wish" I cannot validate.

3) I made it clearly known that i ALWAYS roll on strike, no matter what. I made that clear
a couple times in this thread.

4) Rolling, speads and ratios are all things that i would attempt to
do in a bad situation, and owning the stock is not going to blow me out because i have the funds to purchase the shares un margined.

5) Answered in number 3.

6) Answered in number 3. Common dol, stop using the same points over and over.

7) And what were those lessons in 08? I Do believe i survived those too and profited.

8) So you agree with me here

9) My broker seems to think its not too risky as i am approved to do so
along with the thousands and thousands that are also approved to do so in my brokerage alone.

10) So is ignorance and being scared of what you obviously don't know.

 

[TWORIP]

Quote from jj90:

Then go ahead and trade it if your such a trading guru. Why are you asking for help on understanding margin if you have figured out everything? You obviously chose to ignore the 87' reference others have brought up. I only ask that when you blow up to let us know.

And your posts are the most meaningless of them all. Atleast Dag is trying and making this somewhat enjoyable, at the same time helping to validate the strategy through his critiques. All you can say in both your posts is say that there are 87 refrences by other people why it is not good - in which i have been able to answer them all. But please grow a mind of your own and come up with some original posts if you decide to come here and spit your 2c.
Also once again i will answer you in saying that i HAVE been trading this strategy!

 

[dagnyt]

Quote from TWORIP:

looks like sirziggy answered your post for me.

Oh and, please do tell us about what you were doing and what happened in YOUR blowout when you were trading these 1000 naked puts and calls?

Just playing catchup here, let me get to your next post.

The ignorant cannot be educated.

Please tell me sir ziggy's credentials and experience.

Best of luck to you.

What happened to me is that I learned from my over-confidence. I was a CBOE market maker at the time and quickly discovered that there's no need to earn the last few nickels (they were 'teenies' at the time) on a trade. I learned to respect risk. I learned that selling naked options does not increase profits by enough to take the risk.

As an individual investor, I maintain my discipline. That's the path to success.

Take the advice it or leave it. Your choice.

For those who think my advice is sound, take a look at my recent book The Rookie's Guide to Options.

Mark

 

[sirziggy]

Quote from dagnyt:

You ignore some basics.

1) You can lose money . The market does not have to move 20%. to lose money.

2) You look at 10% on each side as if the only thing to do is to carry the trade all the way to expiration. Guarantee that's a death wish. Let someone else have the last few nickels on the trade.

3) The fear factor. If the market moves and the strike price becomes ATM, some decide to hold and hope for the best. Prudent traders know enough to get out of the risky trade.

4) Rolling is not a simple solution just because the strikes exist. Sometimes the prices are horrible and the rolled position is so poor that the trader would not want to own it.

5) Most people who believe selling naked options is the road to riches feel so confident that they do not roll or close. They hold and hope.

6) Hope is not a strategy.

7) Selling the options is a high probability game. You probably win most of the time. In fact, today's markets are so good for those who have been selling premium that they have already forgotten the lessons of 2008.

8) Naked put selling is a good strategy - but ONLY for investors who want to accumulate stock.

9) Naked cal selling is too risky for most and many brokers will not allow their customers to sell naked calls.

10) Overconfidence is a killer. A killer.

Mark

To address some. I've been trading almost 20 years. I use a multitude of trading strategies and this happens to be one of them. However, I am simply offering up my .2 on the pro's and con's.

1. I never said you won't lose money, you're putting words into my mouth. I said, in case of a 20% market move, you aren't going to go broke as many seem to assume.

2. What do you mean I assume you carry the trade to exp? If the trade goes against you, you can roll it all the way up to expiration and close the other leg. I am taking assumptions in my answers. Who's to say the market didn't go up, you close the 1.25 for .50 and then it drops and you close the other side for .50 and lock in 1500? There is no correct answer for that. I'm addressing the fact people think you will incur catastrophic losses in a 20% move. I would close the trade a few days before to take the risk off the table. Perhaps Tworip does that, I don't know. I'm just using what has been posted thus far.

3. The strategy he mentioned was closing or rolling at the strike. Obviously, if you hold it and pray, you change the dynamic of the game. However, isn't that true for any so called trading strategy? You buy a stock at 20, you should sell if if it loses 8-10%. Most don't sell it at 18, then it drops to 12, so you hold on and pray??? Isn't that why most have lost so much in the past 12 months? The pray and hope strategy?

4. To address this. I'm assuming in a 20% market he just BTC the position and take the 10-15% hit. Obviously, I would have to agree to disagree that on something as liquid as the spy or q's, you couldn't roll you way out, what goes up ALWAYS come down and what goes down, ALWAYS goes up. Aside from bankruptcy or something. But the spy or q's won't go to zero.

5. I agree on with you on this. If you don't roll or reduce risk or do something, you will be screwed everytime.

6. This is true on stocks, options, ETF's, commodities, etc.

7. Please expand on 2008?

8. I agree it's good for accumulating stock, but I for one, don't mind buying SPY or QQQ's at a discount. It is what it is.

9. Calls is more risky but I think if you stick to a game plan, you're fine. With PM obviously you have more then 100k in account value so you could always just buy 1k spy and sell calls and puts and don't have to worry about the unlimited upside issue. You could also just create a spread and buy the a few strikes up, depending on your risk tolerance.

10. Overconfidence and greed are killers. People lose because they stray from a system or thing they can outplay the big boys. Keep with what you know and don't stray from the original strategy. We all know, you should know your exits before you ever enter a trade. So my advice, know what you're going to do in a bad situation before putting on the trade.