naked risk

[whitster]

distribution is irrelevant

that only has to do with distribution. the normal or expected variance in values big whoop

you still don't get it

this is math. it's actually arithmetic.

it is not difficult.

writing a naked put has a PREDEFINED and LIMITED risk.

that is inarguable

it's similar to buying a stock. the risk is PREDETERMINED. it cannot go lower than 0

period

writing a naked call has UNDEFINED risk

the distribution is irrelevant because we are talking about "abnormal" events.

ONE abnormal event in the writing of naked call(s) can WIPE you out.

there is UNDEFINED and UNLIMITED risk

that is simply not true of writing a naked puts

at least if you're gonna write calls, you can hedge. that much is true.

but it is indisputable (this is math guys. not opinion), that you have NO WAY OF KNOWING what a stock price will do in the future.

a stock can theoretically go up any amount overnight for instance. it most probably will not go up 10,000%. we can agree. but it is still (this is inarguable arithmetic) P*O*S*S*I*B*L*E

that is the difference between nekkid puts and calls, and why writing the former has defined the risk, and writing the latter is FAR MORE dangerous.

second of all, i disagree about the nekkid puts being a bad idea

also, to Mr CNMS.

i write naked puts on stocks I like for *fundamental* reasons. these are the lynchian or buffetian stocks i WANT to go down, so i can pick them up cheap.

one example was/is PIXR.

PIXR was an awesome buy after that news came out about "dissapointing" Incredibles DVD sales. when people sold heavily and it gapped down.

i loaded it on the "bad news".

contrarian investing works. period. it's not the ONLY way. but it's a way. and writing naked puts is part of a contrarian investment philosophy.

i write naked puts on a stock i would WANT to own anyways if it went down. PIXR was one example.

the stock market is not efficient. that's how we make money.

 

[Don87109]

Quote from whitster:

distribution is irrelevant

that only has to do with distribution. the normal or expected variance in values big whoop..............................

The definition of Risk includes the magnitude of the event AND the probability of it actually occurring. You seem to dwell only on the magnitude aspect.

Don

 

[FullyArticulate]

Quote from whitster:

distribution is irrelevant

that only has to do with distribution. the normal or expected variance in values big whoop

If distribution were irrelevant, then you have found a secret that no options trading market maker has discovered in the last 30 years of trading options. Since they're willing to sell both puts and calls at roughly the Black-Scholes theoretical price (which assumes even distribution), you should be making a killing buying their sold calls if they are so substantially more risky for the MM.

The bias you have towards selling only puts is why the Put/Call ratio tends to be a pretty good contrarian indicator. The top of the market is generally when people are far more willing to sell puts then calls. Vice-versa for market bottoms.

I don't deny a stock can go to infinity, but can only go to 0, but the probability of these two events aren't even remotely equivalent. Surely "risk" includes probability by definition.

GOOG Mar 340 puts have a pretty good probability of expiring in the money. GOOG Mar 200 puts have virtually no probability. Aren't 340 puts riskier solely based upon that comparison? If you agree that distribution is normal (or perhaps skewed 4.5% upwards), then why do you believe GOOG 480 calls more risky then GOOG 200 puts? Do you really think it's more likely GOOG will go to 480 by the end of the week then 200? If not, then there's no difference in risk. If so, I have some calls I'd like to sell you.

 

[dis]

Naked puts on indices are considerably riskier than naked calls

Quote from cnms2:

Why?

Because index futures may gap down 10-20-30% overnight triggering a huge spike in IV.

 

[FullyArticulate]

Quote from dis:

Naked puts on indices are considerably riskier than naked calls



Because index futures may gap down 10-20-30% overnight triggering a huge spike in IV.

Out of curiosity, in what index and when was there a 10-30% gap down overnight?

The biggest move I could find in the last 7 years (on ES, at least) was a 5% gap down on the open after 9/11/01.

Since 1/1/00, there were 7 gaps up greater then 1% and there were 6 gaps down greater then 1%.

The odds do slightly favor selling calls, as the average > 1% gap up was 1.6%, and the average > 1% gap down was 2.2%.

 

[gbos]

If you are asking less than 0.000001 for those 480 goog calls I am willing to buy a few thousand from you.

It¢s a fair deal; check your Black-Scholes calculator.

 

[Prevail]

Either way you can catch a cold. The market itself considers put on an index more risky by simply looking at the premiums.

 

[FullyArticulate]

Quote from Prevail:

Either way you can catch a cold. The market itself considers put on an index more risky by simply looking at the premiums.

It's possible, but it's also possible this is purely a supply and demand issue. People buy FAR more index puts then calls (primarily as portfolio hedges), hence put prices go up.

 

[whitster]

i get tired of people who can't understand simple arithmetic

"If distribution were irrelevant, then you have found a secret that no options trading market maker has discovered in the last 30 years of trading options. Since they're willing to sell both puts and calls at roughly the Black-Scholes theoretical price (which assumes even distribution), you should be making a killing buying their sold calls if they are so substantially more risky for the MM."

in the short-medium run distribution is of course relevant, but you are missing the big picture.

it is inarguable that mathematically speaking the risk from naked calls is UNDEFINED.

so, whatever the normal curve is, the implied volatility is, etc. is IRRELEVANT in the respect that whatever the EXPECTED variance is , it is only probabilistic, not deterministic.

a stock that has a beta of .2 and normally only moves a few cents a day CAN move $20 overnight. it is still possible.

and it is the EXTRAORDINARY event that will wipe out the naked call writer, not the event that falls in the first standard deviation or two.

it only takes ONE bad trade, when it comes to naked calls to wipe out an account

because the risk is unlimited.

implied volatility only speaks to the PAST to try to predict the future.

it is not deterministic.

arithmetic IS deterministic and irrefutable.

you are speaking to what USUALLY happens. that's great. but given N=(a lot) sometimes the unusual happens

and THAT is what will wipe out a naked call writer

hope that helps

 

[riskarb]

It would help immeasurably if you knew WTF you were talking about, instead of the diarrhea you're intent on depositing to this thread. This isn't 7th grade English comp... you can drop the infinitely-annoying double spacing. 'kay?