naked risk

Quote from whitster:


the ignorance is ASTOUNDING.

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).
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It sure is astounding.

You're making the claim that a move to infinity "torching your portfolio" is more likely then a move to 0 "torching your portfolio". And that somehow outliers only occur (or are far more likely to occur) in the up direction.

This just makes no sense. A 50% up move is just as likely as a 50% down move save statistical skew.

Shouting "it's arithmetic!" doesn't make your argument any more clever. If you were right, your portfolio should be filled with purchased calls because the rest of the world is stupidly selling them to you for WAY too little.

If you're trying to convince us that a short call has "unlimited" risk, then you are absolutely right, your arithmetic has won the day. But really, if you're making decisions based upon the the inevitable, unhedgeable, and unstopable underlying instantaneously moving to infinity, you're going to have serious trouble when this bull market is finally done.

This conversation has moved from an interesting statistical discussion to a pointless, "Nuh-uh" shouting match. About par for the course with ET...
 
Just a thought: maybe people just can't follow your posts. They're long, unstructured, you use no paragraphs and no proper ortography and punctuation. You're obviously free to do whatever you like, but after reading your first post I decided the pain / gain ratio is too high for me.
Quote from whitster:

i get tired of people who can't understand simple arithmetic
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While it's arguable that naked puts have limited risk, in realistic trading it would hurt just as much if a stock halved overnight than it would if it doubled. Case in point 02/28/05 ELN/BIIB. I'm sure whoever shorted naked ATM puts lost more then their acct that day.

I'm no trading guru, but I'd only ever go naked puts on a stock I really wanted to own, and even so it'd had to be under $10, preferably $5.
 
"You're making the claim that a move to infinity "torching your portfolio" is more likely then a move to 0 "torching your portfolio"."


you already know what a move to zero will do to your portfolio

you do not know what the maximum possible upside move will do, because that is an undetermined #.


" And that somehow outliers only occur (or are far more likely to occur) in the up direction"

false. i did not say that. your reading comprehension is as poor as your understanding of arithmetic.

i said that the max risk for the downside move in price is DEFINED. it cannot go below zero

it is NOT defined for the upside.

again, i suggest a refresher in arithmetic.

this is not about relative probabilities of the respective events happening.

it is about what extreme events CAN happen. given sufficient "N" , it will happen

second of all, on a tangential and already mentioned note, i write naked puts on stocks i WANT to own on bad news. buffetian/lynchian stocks. PIXR was the perfect example.


you could write 100's of naked calls and never get hurt. that is entirely possible, even likely - assuming proper risk management.

but GIVEN the indeterminate upside price movement possible (there is no upper boundary of possibility), all it takes is ONE naked call written on an underlying that subsequently TRIPLES (as an example) to wipe out many an account.

a stock cannot drop more than 100%.

a stock CAN rise more than 100%.

that is irrefutable arithmetic. the ignorance astounds me.

it's not about RELATIVE probability. it's the statistical outlier that'll kill you. those lie well beyond the commonplace. but given n=(enough), it may happen sooner or later. and it only takes one.
 
Wow, you're right. It took me the 10th time you said "it's all arithmetic" to really understand how naive I was being. It IS more likely for a stock to double then it is to go to 0! It IS more likely for my sold call to blow out my portfolio then my sold put!

As a result of your input, I'm now changing my strategy to only buying calls. After all, if someone is willing to sell me a call at the Black-Scholes theoretical price, they are vastly underpricing it. They are taking unlimited risk! The arithmetic says so! Indeed, I now understand how little probabilities have to do with my trading thanks to your arithmetic comments. In fact, you've convinced me that everyone buying and selling options has been completely wrong for the last 30 years.

"lognormal distribution"? Ha! Even Mandelbrot was fooled by such chicanery! All these quants on Wall Street obviously are philosophy majors who took a few math courses and thought they could move beyond arithmetics into the heretofore unbeknownst as pseudo-science that is probabliities. They can now be CRUSHED with my new buy-calls-only strategy.

You've really opened my eyes. How can I ever thank arithmetics? Perhaps some Euclidian memorabilia?
 
Quote from gkishot:

That's because stocks historically deliver higher value than cash. But it should not be true for all financial markets and at all times.
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Indices and commodities do not tend to gap like stocks. But THEORETICALLY naked puts have limited risk; naked calls don't. That is true for all instruments, whether you're trading coffee or Starbucks stock.

Risk for naked puts can be quantified; the same is not true for naked calls.

That said, I have never said to myself "Gee, I should sell loads of naked puts, because my risk is limited." Sure, it's limited, but you still can get wiped out (or win a windfall).
 
"Wow, you're right. It took me the 10th time you said "it's all arithmetic" to really understand how naive I was being. It IS more likely for a stock to double then it is to go to 0! It IS more likely for my sold call to blow out my portfolio then my sold put!"

you sling more strawmen than L. Frank Baum

that is not what i said.

when you write a naked put, the risk is LIMITED

in the naked call, it is not

thank God for "trader's" like you.

the willfully ignorant provide liquidity.

if you can make money in the market stubbornly ignoring reality, more power to you.

please tell me - if i write a naked put for a stock that is currently selling for $20, with a strike of $15, what is my MAXIMUM potential loss?

if i write a naked call on the same stock, with a strike of $25, what is my MAXIMUM potential loss?

hope that helps

btw, i have no problem with people writing naked calls. that's not the issue.

people like you who cannot understand mathematics are exactly the grease that keeps the markets moving.

thanks for helping successful traders make money.
 
Quote from smilingsynic:

Indices and commodities do not tend to gap like stocks. But THEORETICALLY naked puts have limited risk; naked calls don't. That is true for all instruments, whether you're trading coffee or Starbucks stock.

Risk for naked puts can be quantified; the same is not true for naked calls.
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Why for EUR/USD pair there is unlimited upside for EUR but not for USD ( which is effectively for EUR/USD puts) ?
 
Quote from FullyArticulate:

Wow, you're right. It took me the 10th time you said "it's all arithmetic" to really understand how naive I was being. It IS more likely for a stock to double then it is to go to 0! It IS more likely for my sold call to blow out my portfolio then my sold put!

As a result of your input, I'm now changing my strategy to only buying calls. After all, if someone is willing to sell me a call at the Black-Scholes theoretical price, they are vastly underpricing it. They are taking unlimited risk! The arithmetic says so! Indeed, I now understand how little probabilities have to do with my trading thanks to your arithmetic comments. In fact, you've convinced me that everyone buying and selling options has been completely wrong for the last 30 years.

"lognormal distribution"? Ha! Even Mandelbrot was fooled by such chicanery! All these quants on Wall Street obviously are philosophy majors who took a few math courses and thought they could move beyond arithmetics into the heretofore unbeknownst as pseudo-science that is probabliities. They can now be CRUSHED with my new buy-calls-only strategy.

You've really opened my eyes. How can I ever thank arithmetics? Perhaps some Euclidian memorabilia?
More...

Actually under the lognormal distribution it is more likely for a stock to double than it is to go to zero. He has a point on that. That is because log(S/So) is normally distributed and not S/So.

However a stock cannot go to infinity because there are practical considerations that forbid such extreme events. It is possible for a small cap firm to earn 1000% or even 10000% in a few months (I have witnessed that), but it is very unlikely that someone will start writing call options on them.
 
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