How to manage open-ended risks like selling options?

helpme_please · Jan 1, 2020

Selling options has been described as an income strategy. What makes me uncomfortable is the risk is open-ended and one can lose more than what is put in. There are horror stories like James Cordier optionsellers.com whose fund specialises in options selling and he even wrote a book on it. He was acknowledged to be an expert and he definitely has the knowledge, yet he blew up.

How do experienced traders here manage open-ended risks like those that come from selling options?

Wheezooo · Jan 1, 2020

helpme_please said:
Selling options has been described as an income strategy. What makes me uncomfortable is the risk is open-ended and one can lose more than what is put in. There are horror stories like James Cordier optionsellers.com whose fund specialises in options selling and he even wrote a book on it. He was acknowledged to be an expert and he definitely has the knowledge, yet he blew up.

How do experienced traders here manage open-ended risks like those that come from selling options?

I would have fired myself.

Bum · Jan 1, 2020

helpme_please said:
Selling options has been described as an income strategy. What makes me uncomfortable is the risk is open-ended and one can lose more than what is put in. There are horror stories like James Cordier optionsellers.com whose fund specialises in options selling and he even wrote a book on it. He was acknowledged to be an expert and he definitely has the knowledge, yet he blew up.

How do experienced traders here manage open-ended risks like those that come from selling options?

Sell SPREADS ONLY .......... unless you're willing to be long/short at your short strike price.
Margin drops considerably also.

stepandfetchit · Jan 1, 2020

helpme_please said:
Selling options has been described as an income strategy. What makes me uncomfortable is the risk is open-ended and one can lose more than what is put in. There are horror stories like James Cordier optionsellers.com whose fund specialises in options selling and he even wrote a book on it. He was acknowledged to be an expert and he definitely has the knowledge, yet he blew up.

How do experienced traders here manage open-ended risks like those that come from selling options?

While my option trading is limited to areas of comfort to me (a tiny subset of the option trading universe), I do focus mostly on "income" strategies that are mostly net short.
My 2 cents:
If you do not have a firm understanding of your trade and it's weak points and the various natures of risk you enter, then only trade with capital you expect will be lost.

You can construct a trade/trading system based on your comfort level and risk tolerance, however the "rub" is the prerequisite that you must understand what you want!

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A partial response to your question... I doubt serious traders (those remaining active for years) ever trade with "open-ended risks"! Trading in a Reg-T account, can be one approach to keep you from "open-ended" risk. (Some here trade PM/SPAN margin, and may be more aggressive than I on risk)

drcruz · Jan 1, 2020

helpme_please said:
Selling options has been described as an income strategy. What makes me uncomfortable is the risk is open-ended and one can lose more than what is put in. There are horror stories like James Cordier optionsellers.com whose fund specialises in options selling and he even wrote a book on it. He was acknowledged to be an expert and he definitely has the knowledge, yet he blew up.

How do experienced traders here manage open-ended risks like those that come from selling options?

Why do you want to sell naked options? I do, but in small positions compared to my total capital. There are structured positions that give a large flat T-0 line so that if the market is in a range you can make money, if the market continues in the primary direction you make money.

Look for Ron Bertino on YouTube. I think SMB might have a free webinar that might be pretty good. John Locke may also have some good stuff

El OchoCinco · Jan 1, 2020

I had no more tha 10 to 20% risk exposed of my total portfolio . You never go short options or spreads and expose your whole portfolio to such risks.

That is the easiest and cleanest way to do it.

MarkBrown · Jan 1, 2020

roll, roll, roll your boat gently to the next month. merrily, merrily, merrily, merrily profits are but a dream.

guru · Jan 1, 2020

helpme_please said:
Selling options has been described as an income strategy. What makes me uncomfortable is the risk is open-ended and one can lose more than what is put in. There are horror stories like James Cordier optionsellers.com whose fund specialises in options selling and he even wrote a book on it. He was acknowledged to be an expert and he definitely has the knowledge, yet he blew up.

How do experienced traders here manage open-ended risks like those that come from selling options?

I would closely observe how @dest does this at https://www.elitetrader.com/et/threads/2020-a-dest-odyssey.339081/
He seems to be selling straddles, but limiting risk by buying put/call on each side, which results in butterflies (can also be done using iron condors). He does this a bit differently (using only puts or only calls each time) but the outcome is the same: it is selling options with limited risk.
He also seems to target specific stock price/strike as required when selling straddles (or trading butterflies and iron condors), then exits after accumulating small profit, maybe 10%-30%, or quickly escape with a small loss or without a loss when price moves against him. At least this is my understanding of his approach, and I'm following just to understand and learn something too. And it still looks like directional trading with risk, so it may not look as simple as selling naked options, but it probably cannot be much simpler for a reason... (meaning you still have to be a trader rather than premium collector)

Wheezooo · Jan 1, 2020

guru said:
I would closely observe how @dest does this at https://www.elitetrader.com/et/threads/2020-a-dest-odyssey.339081/
He seems to be selling straddles, but limiting risk by buying put/call on each side, which results in butterflies (can also be done using iron condors). He does this a bit differently (using only puts or only calls each time) but the outcome is the same: it is selling options with limited risk.
He also seems to target specific stock price/strike as required when selling straddles (or trading butterflies and iron condors), then exits after accumulating small profit, maybe 10%-30%, or quickly escape with a small loss or without a loss when price moves against him. At least this is my understanding of his approach, and I'm following just to understand and learn something too. And it still looks like directional trading with risk, so it may not look as simple as selling naked options, but it probably cannot be much simpler for a reason... (meaning you still have to be a trader rather than premium collector)

I never looked at anything he does, but from your description the difference is enormous. He's simultaneously looking at the surface, and focusing on expected change in vol to price, theta, and his risk; and I'd bet will do different things dependent on the vol level.
The other is just sitting in the corner eating paste, while sticking your finger up your ass and then pulling it out and smelling it.

ET180 · Jan 1, 2020

helpme_please said:
Selling options has been described as an income strategy. What makes me uncomfortable is the risk is open-ended and one can lose more than what is put in.

Similar to how one manages the open-ended risks of being long stock. You can also lose more than you put in if you use leverage.