Naked Calls: Open Interest & Volume? Individual Companies?

[zghorner]

Trying to learn this stuff watching videos and reading constantly but curious on how you all feel about this subject. My question is: Are open interest and volume as important when shorting calls? I guess the obvious answer is: as long as the trade doesnt go against you and the option expires OTM you're good...but since trades often go against you then yes it is still important as you want to be able to close out that position if need be.

Do you all have any guidelines on open interest and volume requirements before you enter a naked call position?

Do any of you short calls on individual stocks or do you mainly stick to major ETFs etc...?

 

[Baozi]

Shorting a call without any other edge & hedge in place seems a dangerous proposition.

open interest and volume in my opinion are meaningless until you reach a certain level of sophistication (and I haven't reached it yet).

If you really really want to short a call, why not doing with a ratio? For instance you buy 1 call slightly OTM and sell 2 more further OTM for a credit. Still dangerous but it extends a bit your safety buffer. On top of that, your P&L won't decline so sharply if you are wrong on direction.

 

[ffs1001]

Do you all have any guidelines on open interest and volume requirements before you enter a naked call position?

As the previous poster mentioned, selling naked short calls on individual stocks can be dangerous. I used to sell a lot of short options - both puts and calls. Have been doing it for nearly a decade. I have the scars to prove it. (Made tons of money, then lost it. Made tons of money again, and then lost it again. Made a little bit more money.)

My two-pence worth (if you are adamant in selling naked shorts ) :

- do it on ETF's or indexes (preferable cash-settled, European style expiry ones like SPX). This way, you do not suffer from company specific risk (dividends, surprise takeover, sudden bad news, CEO caught with his trousers down with the new secretary etc etc).
Also liquidity and volumes are massive, so nothing to worry about in that respect.

- do NOT over-leverage (it's very easy money when things work out month after month, but then BAM! one strong move by the underlying and all your years profits are gone in literally days if not hours - don't believe me? Just have a look at the SPX chart in Dec '18.). Ensure you never go over 50% margin available.

- introduce diversification (eg. trade in SPX combined with some commodities or currencies) to reduce risk and smooth out returns.

Good luck, and happy trading.