My OPTION TRADES..... part 2

Quote from taowave:

<<< Putmaster,I disagree with much of what you believe to be true.
In the sense of pure RISK,a put spread is LESS risky than a naked put.There should be no argument there. >>>

There is plenty of argument there.
If you are the type of investor who selects stocks trading near their highs, or you are a trend follower, or you like to chase volatile stocks for their fantastic credits, or one who goes after the hot stock or hot story of the day/week/month.... then i agree those investors should be doing spreads over naked puts.
But if you are someone who knows a company is financially healthy, stable, and reasonably priced, and you know why you picked a specific price to invest in. And you are willing to consider owning the stock if a bad market drops it, or they miss a particular earnings estimate, ect.... then naked is the way to go.

If a stock drops a penny under a spread traders strikes, his loss is 100% of that investment. As most will NOT be able to buy the stock.
If it drops to the same price for a naked put seller, he can absolutely buy it if he wants to. THe naked seller has the ability to "CHOOSE". The put spread trader loses the ability to CHOOSE.
WHY?
Because of the excessive leverage he is probably on.... and doesn't even know it.


<<< You introduce selling put spreads(plural) to bring in the same amount of money as a naked put,yet you do it with no regard to delta,gamma,skew etc.. >>>

No. The point is you do NOT bring in the same amount of money with a spread as with a naked put. Perhaps a similar theoretical % return. But NOT the same dollar amount.
And spread investors should NOT try to bring in the same dollar amount as selling naked. Doing that is what gets them into trouble.
Because the only way to do it is with excessive leverage.


<<< Your main point is leverage is evil,and you are correct there in the case of put spreads,AND for naked puts. >>>

No. Leverage is NOT evil. It is a very useful and effective "tool" when used intelligently.
My point is, most spread traders do NOT use it intelliigently. In fact, most don't even realize they are using it.
Some may be using leverage of "10 times" the value of their account , and not even be aware they are even using margin.
A naked put seller may margin twice the value of his account. Which is also excessive. But at least they are aware of it.
Compare 10 times margin leverage for a spread trader vs 2 - 3 times for a naked put seller.... and tell me you really think spreads are safer???

Too many spread traders have no idea they are even on a single dollar of margin. When in fact, a spread trader with a $100,000 account could easily be on a MILLION DOLLARS of margin... and not even be aware of it.
DanShilrley was selling credit spreads for years. He had no idea he was on margin all that time. It took me weeks to convince him of it.
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Whether a stock is trading at its all time high or trend follower is 100% irrelavant in deciding to use put spreads or naked puts unless you can back up what you say with the distribution of returns for those scenarios that you choose. I think you are heading in the direction of mean reversion,but its very unclear as to why you make that statement.

As for point two,it appears you are trying to make a distiction between growth and value stocks.Again,naked puts vs spreads is not what the debate should be about.I somewhat understand the framework you operate in.You look at dollars taken in,and pay no regard to delta and gamma.If that works for you,so be it,but that does not imply it is the "correct" method.

Point 3 is flawed.You are choosing a specific path,and of course the worst possible scenario for a spread trader.That is OK as it is a wise practice,but again,you simply view this in the "dollars in" format you employ,and that will "force" one to become overleveraged(equal credits) in a dislocation or zero adjustments. Again,at a bare minimum I would look at the greeks to compare apples to apples.I would also ask you if one should choose to operate in your dollars in world,what happens if stocks go to zero.

Point 4 is your valid point,and as stated,you are talking leverage or possible max notional one will have to take down.That has nothing to do with the risk of put spreads vs naked puts.Dont confuse the two.Selling a put spread is less risky than selling a naked put.That is a given.

You seem to confuse "size" with strategy..




Quote from Put_Master:


There is plenty of argument there.
If you are the type of investor who selects stocks trading near their highs, or you are a trend follower, or you like to chase volatile stocks for their fantastic credits, or one who goes after the hot stock or hot story of the day/week/month.... then i agree those investors should be doing spreads over naked puts.
But if you are someone who knows a company is financially healthy, stable, and reasonably priced, and you know why you picked a specific price to invest in. And you are willing to consider owning the stock if a bad market drops it, or they miss a particular earnings estimate, ect.... then naked is the way to go.

If a stock drops a penny under a spread traders strikes, his loss is 100% of that investment. As most will NOT be able to buy the stock.
If it drops to the same price for a naked put seller, he can absolutely buy it if he wants to. THe naked seller has the ability to "CHOOSE". The put spread trader loses the ability to CHOOSE.
WHY?
Because of the excessive leverage he is probably on.... and doesn't even know it.

No. The point is you do NOT bring in the same amount of money with a spread as with a naked put. Perhaps a similar theoretical % return. But NOT the same dollar amount.
And spread investors should NOT try to bring in the same dollar amount as selling naked. Doing that is what gets them into trouble.
Because the only way to do it is with excessive leverage.


No. Leverage is NOT evil. It is a very useful and effective "tool" when used intelligently.
My point is, most spread traders do NOT use it intelliigently. In fact, most don't even realize they are using it.
Some may be using leverage of "10 times" the value of their account , and not even be aware they are even using margin.
A naked put seller may margin twice the value of his account. Which is also excessive. But at least they are aware of it.
Compare 10 times margin leverage for a spread trader vs 2 - 3 times for a naked put seller.... and tell me you really think spreads are safer???

Too many spread traders have no idea they are even on a single dollar of margin. When in fact, a spread trader with a $100,000 account could easily be on a MILLION DOLLARS of margin... and not even be aware of it.
DanShilrley was selling credit spreads for years. He had no idea he was on margin all that time. It took me weeks to convince him of it. [/B]
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Atticus,if I undertand correctly,you are in favor of selling one month ATM options on singles and conversely buying ATM singles as well?

FYI,I respect your opinion and find that "interesting".
I tend to look at my delta decay relationship a bit more

By and large,my trading(systems and discretionary) cant afford the premium of the ATM strike.






Quote from atticus:
Long options will always have the peak gamma ATM, although a -slope to speed. The magnitude is more important than sign, so it's best IMO to be long ATM when trading singles. Just my opinion. [/B]
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Quote from taowave:

<<< Whether a stock is trading at its all time high or trend follower is 100% irrelavant in deciding to use put spreads or naked puts unless you can back up what you say >>>

I say that in the "context" that many spread traders feel that because their trades are protected (hedged), they can take chances they might not otherwise take. That being, invest in more volatile stocks, more over valued stocks, financially unstable stocks, ect...


<<< Again,naked puts vs spreads is not what the debate should be about.I somewhat understand the framework you operate in.You look at dollars taken in,and pay no regard to delta and gamma. >>>

But naked vs spread is what the debate is about. It's not that I don't look at the greeks. I'm just more influenced by the big picture they create,... than by the multitute of fluctuating smaller details that the big picture is composed of.
And I actually do not look at dollars taken in. I look at annualized % return, as my "basis of standardization", used to compare one trade with another, per unit of time.



<<< Point 3 is flawed.You are choosing a specific path,and of course the worst possible scenario for a spread trader.That is OK as it is a wise practice,but again,you simply view this in the "dollars in" format you employ,and that will "force" one to become overleveraged(equal credits) in a dislocation or zero adjustment >>>

There are no "adjustments" for the spread trader.
That's just a fancy way to say "close the trade for a loss".
As to your first point that the spread trader may become over leveraged because he is trying to earn similar credits as a naked put seller.....
It's not that he is deliberately trying to equal the dollars a naked put seller would have earned on the same trade.
It's that, because he puts up a more limited margin for his trade, and as a result has more cash left over to use for other trades, he will usually over leverage his account using that remaing cash on the same trade or additional spread trades.

For example, if i have $25,000 to use selling a $40 naked put, I can sell 6 contracts.
If the spread trader wants the same trade via a $40/$37.5 spread, he can sell 100 contracts. In both cases we've both set aside the same margin requirement.
it will cost me $25,000 to buy the stock if it drops a penny under $40.
It will cost him $400,000 to buy it.
If the stock drops a penny under $37.50, the naked seller has the choice of buying the stock at $40 for $25,000.
The spread trader will lose his $25,000 investment, as he is leverage 16 times his account value.

It really doesn't matter if he puts the $25,000 in one trade or diversifies it. The point being, he will probably use the entire $25,000. Hence be at the same risk of a total wipe out, if there is even a minor drop below his strikes.



<<< Selling a put spread is less risky than selling a naked put.That is a given. >>>

Read the above again and tell me if you still think so.


<<< You seem to confuse "size" with strategy >>>

That's what she said.
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Putmaster,where did you come up with these observations??

I really dont have an axe to grind either way,but your arguments represent knuckleheads not spread traders..

Put spreads are less risky than naked puts.Options 101.
Nothing to do with margin requirements.Again,you are talking size,Big Boy:)

And for what it is worth,I will almost guarantee that more money has been lost in the equity markets by naked put sellers than "overleveraged" put spread sellers..





Quote from Put_Master:

Quote from taowave:

<<< Whether a stock is trading at its all time high or trend follower is 100% irrelavant in deciding to use put spreads or naked puts unless you can back up what you say >>>

I say that in the "context" that many spread traders feel that because their trades are protected (hedged), they can take chances they might not otherwise take. That being, invest in more volatile stocks, more over valued stocks, financially unstable stocks, ect...


<<< Again,naked puts vs spreads is not what the debate should be about.I somewhat understand the framework you operate in.You look at dollars taken in,and pay no regard to delta and gamma. >>>

But naked vs spread is what the debate is about. It's not that I don't look at the greeks. I'm just more influenced by the big picture they create,... than by the multitute of fluctuating smaller details that the big picture is composed of.
And I actually do not look at dollars taken in. I look at annualized % return, as my "basis of standardization", used to compare one trade with another, per unit of time.



<<< Point 3 is flawed.You are choosing a specific path,and of course the worst possible scenario for a spread trader.That is OK as it is a wise practice,but again,you simply view this in the "dollars in" format you employ,and that will "force" one to become overleveraged(equal credits) in a dislocation or zero adjustment >>>

There are no "adjustments" for the spread trader.
That's just a fancy way to say "close the trade for a loss".
As to your first point that the spread trader may become over leveraged because he is trying to earn similar credits as a naked put seller.....
It's not that he is deliberately trying to equal the dollars a naked put seller would have earned on the same trade.
It's that, because he puts up a more limited margin for his trade, and as a result has more cash left over to use for other trades, he will usually over leverage his account using that remaing cash on the same trade or additional spread trades.

For example, if i have $25,000 to use selling a $40 naked put, I can sell 6 contracts.
If the spread trader wants the same trade via a $40/$37.5 spread, he can sell 100 contracts. In both cases we've both set aside the same margin requirement.
it will cost me $25,000 to buy the stock if it drops a penny under $40.
It will cost him $400,000 to buy it.
If the stock drops a penny under $37.50, the naked seller has the choice of buying the stock at $40 for $25,000.
The spread trader will lose his $25,000 investment, as he is leverage 16 times his account value.

It really doesn't matter if he puts the $25,000 in one trade or diversifies it. The point being, he will probably use the entire $25,000. Hence be at the same risk of a total wipe out, if there is even a minor drop below his strikes.



<<< Selling a put spread is less risky than selling a naked put.That is a given. >>>

Read the above again and tell me if you still think so.


<<< You seem to confuse "size" with strategy >>>

That's what she said.
More...
More...
 
08-28-12 01:43 PM

Putmaster,where did you come up with these observations??

I really dont have an axe to grind either way,but your arguments represent knuckleheads not spread traders..

Put spreads are less risky than naked puts.Options 101.
Nothing to do with margin requirements.Again,you are talking sixe,Big Boy

And for what it is worth,I will almost guarantee that more money has been lost in the equity markets by naked put sellers than "overleveraged" put spread sellers..
----------------------------------------------------------------------------------


Now i know how the interrogaters felt when they questioned
BERNIE MADOFF investment philosophies and his defense of them

"Split strike conversion strategy.."

cheers
john
 
Quote from Appleseed:



And for what it is worth,I will almost guarantee that more money has been lost in the equity markets by naked put sellers than "overleveraged" put spread sellers..
----------------------------------------------------------------------------------


Now i know how the interrogaters felt when they questioned
BERNIE MADOFF investment philosophies and his defense of them

"Split strike conversion strategy.."

cheers
john
More...

Now you're talking out of your ass. Naked put sellers have been limited to RegT while spreaders are limited to risk, and in some cases their entire portfolio.

You can sell an 8-lot of AAPL Sep 665P with $100k under RegT. You can sell 70 640/660 Sep put spreads. Who will blow-out first under 2 sigmas lower?

And since you mentioned it... what the synthetic to Madoff's "split strike conversion"?
 
Quote from atticus:

Now you're talking out of your ass. Naked put sellers have been limited to RegT while spreaders are limited to risk, and in some cases their entire portfolio.

You can sell an 8-lot of AAPL Sep 665P with $100k under RegT. You can sell 70 640/660 Sep put spreads. Who will blow-out first under 2 sigmas lower?

And since you mentioned it... what the synthetic to Madoff's "split strike conversion"?
More...


that is if you're dumb enough to risk your entire stake on spreads...I can't imagine a spread trader being so dumb...

btw....putz master.....using leverage properly and only risking what you have earned (i.e., not your original stake) there is no fucking way naked put selling can even compare to someone that has a consistent debit spread strategy that earns $2 for every $1 bet. you can theoretically grow your account exponentially...operative word being theoretically

caveat: i'm referring to debit spreads
 
Quote from HurricaneUS:

<<< That is if you're dumb enough to risk your entire stake on spreads...I can't imagine a spread trader being so dumb. >>>

There are plenty of investors, mostly novice, who get into a strategy of credit spreads, mostly because they think it is so safe.
They think their losses are limited,... and they're not using any margin,... and they feel they are protected against a major stock drop and/or a drop to potentially zero. Doesn't that sound safe?
Credit spreads really do sound good on paper!!!

In reality, the losses they think are limited, are only limited to the size of their entire account value.
They don't realize that just because their stock can't drop in value to zero,.... their account value can.
And they think because they are not being charged for using margin leverage, they are therefore not on margin.
In reality, most spread traders are on margin. Serious margin.

In reality, they can easily be on 10 - 20 times more margin than their account is worth in total.
My $40/$37.5 spread example above clearly showed that.
And ATTICUS's apple example really showed that. And a less wide APPL spread gap would have made the margin situation even worse.
Can you imagine a spread trader being dumb enough to let his APPL spread get even close to his strikes, before closing them down for a loss?
And yet, because he feels "protected",.... he probably will let it get too close, or perhaps even inside.

A naked put seller can only leverage 2 - 3 times his account value, While a spread trader, who may not even know he is using leverage, can margin his account value by a factor of 10, 20, or waaaaay more.
Why do you assume they would only use a tiny portion of their cash, so as to not over leverage?
Do you seriously think most spread traders will only use 25 - 30% of their cash?
Do you seriously think they are keeping a 70 - 75% cash reserve,.... just in case they want to buy their stock(s)?
Seriously?
More...
 
Quote from Put_Master:

Quote from HurricaneUS:

<<< That is if you're dumb enough to risk your entire stake on spreads...I can't imagine a spread trader being so dumb. >>>

There are plenty of investors, mostly novice, who get into a strategy of credit spreads, mostly because they think it is so safe.
They think their losses are limited,... and they're not using any margin,... and they feel they are protected against a major stock drop and/or a drop to potentially zero. Doesn't that sound safe?
Credit spreads really do sound good on paper!!!

In reality, the losses they think are limited, are only limited to the size of their entire account value.
They don't realize that just because their stock can't drop in value to zero,.... their account value can.
And they think because they are not being charged for using margin leverage, they are therefore not on margin.
In reality, most spread traders are on margin. Serious margin.

In reality, they can easily be on 10 - 20 times more margin than their account is worth in total.
My $40/$37.5 spread example above clearly showed that.
And ATTICUS's apple example really showed that. And a less wide APPL spread gap would have made is margin situation even worse.
Can you imagine a spread trader being dumb enough to let his APPL spread get even close to his strikes, before closing them down for a loss?
And yet, because he feels "protected",.... he probably will let it get too close, or perhaps even inside.

A naked put seller can only leverage 2 - 3 times his account value, While a spread trader, who may not even know he is using leverage, can margin his account value by a factor of 10, 20, or waaaaay more.
Why do you assume they would only use a tiny portion of their cash, so as to not over leverage?
Do you seriously think most spread traders will only use 25 - 30% of their cash?
Do you seriously think they are keeping a 70 - 75% cash reserve,.... just in case they want to buy their stock(s)?
Seriously?
More...

so you only want to limit this conversation to credit spreads then?

what about debit spreads?
More...
 
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