How to manage open-ended risks like selling options?

[Wheezooo]

Selling 1 ATM put is always a less risky way to express directional bias than going long 100 shares of the underlying.

ROFLMAO... That's awesome. Essentially a tautology of +50 is always less risky than +100, until the moment of expiration where the two can become identical. (so much for the word always) Hmmm... Wow, that's better than pointing out differences in bilateral symmetry you neglect in your initial statement. This is awesome shit. Thanks. It's like a riddle wrapped in an enigma. Ah, the genius that can be discovered in the investigation of ignorance. I must ponder this...

 

[ET180]

Come up with as many false analogies as you want. What I stated is true. Worst outcome of selling 1 ATM put is eventual assignment of shares at a discount to what the market is currently willing to offer. Plug in some numbers and you'll eventually realize that what I said is true.

 

[ET180]

When you sell naked options you are in the insurance business selling insurance.

So when I go to the hardware store to buy a hammer, am I then in the construction business? It's more useful to look at it as risk : reward. Say I want to buy XYZ. At what price would I be willing to buy shares of XYZ? How much upside would I be willing to sacrifice in order to acquire shares at a lower price? That ratio of risk : reward can be altered through options.

 

[zdreg]

Come up with as many false analogies as you want. What I stated is true. Worst outcome of selling 1 ATM put is eventual assignment of shares at a discount to what the market is currently willing to offer. Plug in some numbers and you'll eventually realize that what I said is true.

True and meaningless. Snake oil salesman tell others to do the numbers. You show the example. Then anybody can examine your assumptions.

 

[zdreg]

At what price would I be willing to buy shares of XYZ? How much upside would I be willing to sacrifice in order to acquire shares at a lower price? That ratio of risk : reward can be altered through options.

Retail traders who sell naked options are not looking to acquire the stock. Therefore any conclusions you draw are incorrect.

 

[Wheezooo]

Come up with as many false analogies as you want. What I stated is true. Worst outcome of selling 1 ATM put is eventual assignment of shares at a discount to what the market is currently willing to offer. Plug in some numbers and you'll eventually realize that what I said is true.

I made no analogies.
You need to look up the definition of tautology.

Beyond that, everything else I said is correct. One is expressing next instantaneous move on a Delta basis. That both maintain a 1 to 1 risk reward ratio. And you have less risk because you have equivalently less reward potential. Illustrated perfectly. By using an atm for your exampie. The other is related to analyzing forward risk based on mtm accounting.

 

[zdreg]

I made no analogies.
You need to look up the definition of tautology.

Beyond that, everything else I said is correct. One is expressing next instantaneous move on a Delta basis. That both maintain a 1 to 1 risk reward ratio. And you have less risk because you have equivalently less reward potential. Illustrated perfectly. By using an atm for your exampie. The other is related to analyzing forward risk based on mtm accounting.

Both of you are starting to talk out of a hat. Skip the fancy terms. Is it beyond the ability of both of you to show a concrete example to answer the original question
How to manage open-ended risks like selling options?

 

[El OchoCinco]

Come up with as many false analogies as you want. What I stated is true. Worst outcome of selling 1 ATM put is eventual assignment of shares at a discount to what the market is currently willing to offer. Plug in some numbers and you'll eventually realize that what I said is true.

Very simplistic view.

If you sell a $100 Strike Put and stock tanks to $50, I dont think putting a bow on a pig by saying you still are being put the stock at a slight discount. The premium collected is meaningless to the large loss absorbed because what the market is willing to offer is a huge loss if you cover.

It is like saying that if you sell that put the worst you can lose is $100.per share minus the premium. Yeah it is better than if you were long the stock outright at $100 and it went to zero but you still lost quite a lot.

 

[Wheezooo]

Both of you are starting to talk out of a hat. Skip the fancy terms. Is it beyond the ability of both of you to show a concrete example to answer the original question
How to manage open-ended risks like selling options?

See post #2. That was my answer. That is exactly how I would manage it. That is exactly how I learned it should be managed.

I'd fire my ass just for putting it on. But that's theoretical, as I never would have traded in the first place if I didn't know not to put it on.

Was that answer clear and direct enough?

 

[ET180]

True and meaningless. Snake oil salesman tell others to do the numbers. You show the example. Then anybody can examine your assumptions.

Take any stock. What's the cost to buy 100 shares? What's the premium on the ATM put? Worst situation: company goes bankrupt. You'll lose more money with the long stock than short put. Only exception would be if the company paid a very high dividend and the premium ended up being less than the dividend. Extremely unlikely.

Retail traders who sell naked options are not looking to acquire the stock. Therefore any conclusions you draw are incorrect.

So you speak for all retail traders? Wrong. I very frequently sell ATM and slightly ITM puts to hedge calls / adjust delta / add new exposure.

One is expressing next instantaneous move on a Delta basis. That both maintain a 1 to 1 risk reward ratio. And you have less risk because you have equivalently less reward potential. Illustrated perfectly. By using an atm for your exampie. The other is related to analyzing forward risk based on mtm accounting.

As I pointed out above, even in the worst-case situation, short put exposes the investor to less absolute risk due to the premium received. Although it's true that the premium comes at the price of reduced maximum reward potential, you won't be able to convince your broker to extend extra leverage because you think some asset has more reward potential. Send me a link to the concept that you are describing by: "The other is related to analyzing forward risk based on mtm accounting."

It is like saying that if you sell that put the worst you can lose is $100.per share minus the premium. Yeah it is better than if you were long the stock outright at $100 and it went to zero but you still lost quite a lot.

Ok, so we are in agreement that it's still less risky than long stock. I never claimed that put selling is risk-free.