naked risk
- Thread starter ra1
- Start date
"I tend to disagree. The risks should be simmetric. It means only one thing - the risk on naked calls is also limited"
the ignorance is ASTOUNDING.
first of all, whether it "should" be symmetrical (note spelling), is not the issue.
stocks don't always move the way they SHOULD move.
we are talking about outlier events. that is where the real risk lies.
no matter how bad the news, a stock cannot move BELOW zero.
thus, for one writing a naked put, the risk is determinable. the MAXIMUM risk is already known.
for one writing a naked call, it is not. There is no upper boundary. Zero is the lower boundary. The upper boundary is theoretically limitless.
all it takes is one outlier to torch your portfolio with naked calls. that is not the case with puts (assuming of course the price risk from current down to zero is not greater than your capitalization).
this is arithmetic.
step outside your narrow and irrelevant models and deal with reality.
a stock CANNOT go below zero.
thus, for any naked put writer, his risk is already known
this is not true to the upside. therefore, while it may or may not be true that the risk SHOULD be symmetrical, the reality is that the boundaries show that it is NOT symmetrical.
you sound like one of these old skool academics arguing "well the stock market SHOULD be efficient therefore you cannot beat the market".
step outside an irrelevant model and deal with OUTLIER events.
the ignorance is ASTOUNDING.
first of all, whether it "should" be symmetrical (note spelling), is not the issue.
stocks don't always move the way they SHOULD move.
we are talking about outlier events. that is where the real risk lies.
no matter how bad the news, a stock cannot move BELOW zero.
thus, for one writing a naked put, the risk is determinable. the MAXIMUM risk is already known.
for one writing a naked call, it is not. There is no upper boundary. Zero is the lower boundary. The upper boundary is theoretically limitless.
all it takes is one outlier to torch your portfolio with naked calls. that is not the case with puts (assuming of course the price risk from current down to zero is not greater than your capitalization).
this is arithmetic.
step outside your narrow and irrelevant models and deal with reality.
a stock CANNOT go below zero.
thus, for any naked put writer, his risk is already known
this is not true to the upside. therefore, while it may or may not be true that the risk SHOULD be symmetrical, the reality is that the boundaries show that it is NOT symmetrical.
you sound like one of these old skool academics arguing "well the stock market SHOULD be efficient therefore you cannot beat the market".
step outside an irrelevant model and deal with OUTLIER events.
This has not happened yet, but it may happen. The SEC and exchanges are ready.
One should not assume that one would be able to adjust and/or close a naked puts position before one's broker, responding to a margin call, takes a wrecking ball to one's account at the least opportune time.
Naked puts have limited risk, naked calls have unlimited risk. The price of the stock is irrelevant.
For that reason some brokers will allow one to sell cash-secured puts. But I have yet to hear cash-secured calls.
