How to manage open-ended risks like selling options?

[El OchoCinco]

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.



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.



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."



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

Yeah but that still does not address the risks accurately to newbies. to say the naked put is technically less risk than owning stock outright is winning on a technicality. However getting wiped out is getting wiped.out regardless of your loss.was reduced by $2.00/ share.

 

[ET180]

Yeah but that still does not address the risks accurately to newbies. to say the naked put is technically less risk than owning stock outright is winning on a technicality. However getting wiped out is getting wiped.out regardless of your loss.was reduced by $2.00/ share.

Newbies should not be buying stocks that stand a significant risk of complete wipeout. At least not to the level that they become a significant holding. If they limit themselves to major index and sector ETFs (non-leveraged) then they should not be worried about a complete loss.

 

[El OchoCinco]

What they should not be doing and what they end up doing are often 2 different things... that is why they are newbies

 

[Tomaz26]

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 think you misunderstood Wheezooo. You are not comparing same things here. If you sell 1 ATM option sure your risk is lower, because you only own half the deltas.. It would be comparable only if you sold 2 x ATM option. Then you can compare 100 to 100 of deltas.. And yes, even 2x ATM can be lower risk. There is a strategy that does just that on SP500. Instead of owning SP500, one sells 2x ATM monthly each month. This strategy underperforms in big bull market, but outperforms in bear market. You can view it as lower volatility or smoothed returns in a big enough cycle.. But anyway you for sure cannot compare selling 1 x ATM to being long underlaying.. This way you severely underperform during bull, but yeah, you do outperform in bear market, but instead you could also just go long underlaying with 50 % of money and put the other 50 % in low yielding asset and voila, same thing..

 

[ET180]

I think you misunderstood Wheezooo. You are not comparing same things here. If you sell 1 ATM option sure your risk is lower, because you only own half the deltas.. It would be comparable only if you sold 2 x ATM option. Then you can compare 100 to 100 of deltas.. And yes, even 2x ATM can be lower risk. There is a strategy that does just that on SP500. Instead of owning SP500, one sells 2x ATM monthly each month. This strategy underperforms in big bull market, but outperforms in bear market. You can view it as lower volatility or smoothed returns in a big enough cycle.. But anyway you for sure cannot compare selling 1 x ATM to being long underlaying.. This way you severely underperform during bull, but yeah, you do outperform in bear market, but instead you could also just go long underlaying with 50 % of money and put the other 50 % in low yielding asset and voila, same thing..

It's flawed to analyze risk based only on deltas. Because if I sell an ATM put and an ATM call, I have zero deltas (roughly +50 from the put and -50 from the call) and if one only considers delta that would imply no risk. But obviously delta-neutral strategies contain risk. That premium does not come for free.

Also, in many cases the shorting an ATM put will provide a better total return until expiration than buying 100 shares of the underlying...depends on what happens. In a strong bull market, long shares or long calls should offer better performance. Volatility typically also drops in a strong bull which will reduce the premium collected further lowering the benefit of put selling.

 

[ironchef]

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.

What killed most retails writing calls & puts is we generally do it naked and on margin to juice returns.

 

[El OchoCinco]

What killed most retails writing calls & puts is we generally do it naked and on margin to juice returns.

True

 

[horizon]

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

Is the option selling strategy not working for you? I had to roll and end up give up the rolling in the middle of the road so lost money. The strategy so far is working but i did not follow it all the way.

 

[ironchef]

Is the option selling strategy not working for you? I had to roll and end up give up the rolling in the middle of the road so lost money. The strategy so far is working but i did not follow it all the way.

Hindsight is always 20/20.

This, mostly true for the past decade:

In a strong bull market, long shares or long calls should offer better performance. Volatility typically also drops in a strong bull which will reduce the premium collected further lowering the benefit of put selling.

This year, not so much.