naked risk

ra1 · Mar 10, 2006

I'm pondering the following:
Out of these two stock option strategies, which is the more risky?
1. naked call
2. naked put
Imo they are equally risky since a stock can go up or down. However, definitions-wise the naked call has "unlimited" risk and the naked put "limited" risk and this is touted by brokerage houses to advocate covered call strategies amongst their clients. What do traders think?
ra1

OptionsWizard · Mar 10, 2006

Quote from ra1:

I'm pondering the following:
Out of these two stock option strategies, which is the more risky?
1. naked call
2. naked put
Imo they are equally risky since a stock can go up or down. However, definitions-wise the naked call has "unlimited" risk and the naked put "limited" risk and this is touted by brokerage houses to advocate covered call strategies amongst their clients. What do traders think?
ra1

Naked PUT is more risky because stocks tend to sell off faster then they rally. Also in many cases the the implied volatility increases when stock goes down.
Case in point: GOOG

BTW, the risk profile for naked PUT is equivalent to that of covered CALL (unlimited downside risk and capped upside profit)

GATrader · Mar 10, 2006

Out of the 10000 stocks I have yet to witness a stock that went to infinity. Naked calls might be easier to manage than naked puts. There is always better liquidity from the buy writes as the stock is ripping up. Then of course there are the gaps...

riskarb · Mar 10, 2006

Which carries more risk: the $5 call or put?

jj90 · Mar 10, 2006

Which is more risky is kinda like saying I have a loaded 38. and a loaded 357. in my hands. Which is more dangerous if I point it at my head? Obviously one has a bigger bang and will hurt more but I think you get the point.

OptionsWizard · Mar 10, 2006

Quote from riskarb:

Which carries more risk: the $5 call or put?

That's a great point. so we can state that as close as a stock price is to 0, naked CALLs become more risky.

riskarb · Mar 10, 2006

Quote from OptionsWizard:

That's a great point. so we can state that as close as a stock price is to 0, naked CALLs become more risky.

It illustrates the risks of an asymmetrical/skewed [log]distribution, but the .38 vs. .357 analogy is excellent -- both can kill.

ra1 · Mar 11, 2006

Thanks everyone for your great replies!
ra1

cnms2 · Mar 11, 2006

Not if you point them to your toe nail (money management)

Quote from riskarb:

It illustrates the risks of an asymmetrical/skewed [log]distribution, but the .38 vs. .357 analogy is excellent -- both can kill.

timbo · Mar 11, 2006

Quote from cnms2:

Not if you point them to your toe nail (money management)

Money management is equivalent to TA.

Sad truth.

naked risk

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