Is naked option writing really that bad?

[OptionsOptionsOptions]

RE: Naked puts and cash covered puts are not the same.

I get the impression that Naked Puts are in an account with enough cash that covers the margin requirements for the short puts. While Cash Covered Puts are in an account that has the cash to buy the stock in full.

Profit and losses would be the same in both cases.

 

[ironchef]

ironchef

• Could you use real quotes in your example?
• Any stock will be fine.
  
• Real quotes will be significantly different than the quotes you have provided.
• I hate trade examples that use terms like: "you probably collect", "will likely be worth"

My example is 8+ month otm. Try again. ..

OK, here is a real life example: SPY June 15 $125 strike puts,

I was too pessimistic, the premium was $.05 (for a $100 stock, the equivalent is $.02) instead of $.02, so you received $5,000 in premium for 1,000 contracts.

If SPY dropped to $125 (50% drop), the put premium @ $125 put would be ~$9 or you need $12,500,000 to be put the 1,000 contracts. Otherwise, you need $900,000 to close the put contracts.

If you go 8+ months out, your 1,000 contract gets you $21,000 in premium you still need $12,500,000 to be put. But to close out an ATM $125 SPY, you will need $1,600,000 in cash.

edit: This game favors the rich, for if you don't use margins and wait it out, the chance of SPY stays at 50% drop is quite low and if you are put, it would be your luckiest trade because like 2008, SPY eventually recovers and you will make obscene profit for buying SPY @ $125.

 

[viruscore1]

OK, here is a real life example: SPY June 15 $125 strike puts,

View attachment 184268

I was too pessimistic, the premium was $.05 (for a $100 stock, the equivalent is $.02) instead of $.02, so you received $5,000 in premium for 1,000 contracts.

If SPY dropped to $125 (50% drop), the put premium @ $125 put would be ~$9 or you need $12,500,000 to be put the 1,000 contracts. Otherwise, you need $900,000 to close the put contracts.

If you go 8+ months out, your 1,000 contract gets you $21,000 in premium you still need $12,500,000 to be put. But to close out an ATM $125 SPY, you will need $1,600,000 in cash.

edit: This game favors the rich, for if you don't use margins and wait it out, the chance of SPY stays at 50% drop is quite low and if you are put, it would be your luckiest trade because like 2008, SPY eventually recovers and you will make obscene profit for buying SPY @ $125.

You know i said TSLA and not SPY ...

 

[ironchef]

You know i said TSLA and not SPY ...

You can go to your brokerage website, use their same option chain on TESLA, the outcome should be similar if not more expensive losses for selling TSLA 50% OTM put 8 months out and TSLA drops 50% because the IV is much higher.

Edit: For TSLA, your premium for 1,000 contracts for Sep2018 $125 put would be $400,000. Your loss if TSLA goes to $125 would be $4,000,000 if you have to close it out. You still need $12,500,000 to be put. You are a person of great means, I assumed.

 

[viruscore1]

You can go to your brokerage website, use their same option chain on TESLA, the outcome should be similar if not more expensive losses for selling TSLA 50% OTM put 8 months out and TSLA drops 50% because the IV is much higher.

I already have. I have live trade short put on BABA and premium is not in the pennies. Did you even look at TSLA option chain? Here it is ...

BTW 50% is used for conversation. You jumped on it as if it was a rule. FYI it is not. Actually 15-25% is used to calculate OTM strike, 4 to 8 months out.
You're taken the thread off on a tangent.

 

[Pekelo]

You're taken the thread off on a tangent.

I don't think the OP minds with his 1 post count.

But anyway you are wrong. Ironchef is right, end of story.

 

[viruscore1]

I don't think the OP minds with his 1 post count.

But anyway you are wrong. Ironchef is right, end of story.

He's right with spy but that was not my example! Not even close ...

 

[ironchef]

I already have. I have live trade short put on BABA and premium is not in the pennies. Did you even look at TSLA option chain? Here it is ...

View attachment 184292
BTW 50% is used for conversation. You jumped on it as if it was a rule. FYI it is not. Actually 15-25% is used to calculate OTM strike, 4 to 8 months out.
You're taken the thread off on a tangent.

Yes I modified my response to reflect the same chain you posted. I am neither supporting selling or buying puts because I do both.

Actually to me the take away for all these discussions are:

1. If I sell TSLA DOTM put options (@$125) I have a success probability of ~94% (~.06 delta).

2. To make money on the sell side, with a low probability of loss, I want to leverage to the hilt a few times and then retire. Take my example, if I can sell 1000 contracts for $400,000 three times, my odds of winning would still be >83% and I can retire with $1,200,000 in the bank.

3. If I sell 1 contract each time, after 1,000 trades, my odds of encounter at least one loss that can wipe me out is close to 100%.

So, if I sell puts/calls, trade often and trade small is the sure road to ruin, I need to do situation trades, trade big, a few times only and wait.

Regards,

 

[Sweet Bobby]

What’s an option?

 

[viruscore1]

Yes I modified my response to reflect the same chain you posted. I am neither supporting selling or buying puts because I do both.

Actually to me the take away for all these discussions are:

1. If I sell TSLA DOTM put options (@$125) I have a success probability of ~94% (~.06 delta).

2. To make money on the sell side, with a low probability of loss, I want to leverage to the hilt a few times and then retire. Take my example, if I can sell 1000 contracts for $400,000 three times, my odds of winning would still be >83% and I can retire with $1,200,000 in the bank.

3. If I sell 1 contract each time, after 1,000 trades, my odds of encounter at least one loss that can wipe me out is close to 100%.

So, if I sell puts/calls, trade often and trade small is the sure road to ruin, I need to do situation trades, trade big, a few times only and wait.

Regards,

I never said i trade my example, just merely pointing out their is premiums far out of the money many months out. You went off on a tangent with failed trade on spy. I do trade the setup with a vertical spread with 10's contracts. But that is another thread.