How, then, can one QUANTIFY the maximum future risk of naked calls?
naked risk
- Thread starter ra1
- Start date
How, then, can one QUANTIFY the maximum future risk of naked calls?
"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. "
again, completely ignoring the point
the issue is like one of home insurance
under "lognormal distibution", it is far more likely for my house NOT to catch on fire and burn to a crisp, than it is for it to do so.
does this mean i should be "unhedged long" my home and not buy insurance?
same point
i could probably (statistically speaking), own my home for 20 yrs and never need homeowners insurance, and any claim i would have made would be still more expensive considering premiums, than if i paid it out of pocket.
EXCEPT for the exceptionally rare instance of my house catching on fire, and me losing my entire investment (or in the case of those who own a home on margin, owing the bank money for a bunch of ashes).
same concept
this is not about RELATIVE probabilities of events.
it is about the risk assumed in the ABNORMAL event.
it is ABNORMAL (statistically speaking) for my house to catch on fire.
the VAST majority of houses never burn down
it is ABNORMAL for a stock to multiply * 300% overnight
however, the damage taken by somebody who has written naked calls in the latter can be devastating.
so, again, the response was correct.
the issue is not about probabilities of event X occurring
the issue was that IF event X occurs, what is the risk? a naked put has defined risk. a naked call does not
now, i am ready for somebody completely ignorant of basic arithmetic to start bringing irrelevancies about volatility and lognormal distributions
that is concentrating on minutae while ignoring the proverbial options forest
it's absurd, but typical of sophist academic wanking, that is ignorant of real world trading.
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. "
again, completely ignoring the point
the issue is like one of home insurance
under "lognormal distibution", it is far more likely for my house NOT to catch on fire and burn to a crisp, than it is for it to do so.
does this mean i should be "unhedged long" my home and not buy insurance?
same point
i could probably (statistically speaking), own my home for 20 yrs and never need homeowners insurance, and any claim i would have made would be still more expensive considering premiums, than if i paid it out of pocket.
EXCEPT for the exceptionally rare instance of my house catching on fire, and me losing my entire investment (or in the case of those who own a home on margin, owing the bank money for a bunch of ashes).
same concept
this is not about RELATIVE probabilities of events.
it is about the risk assumed in the ABNORMAL event.
it is ABNORMAL (statistically speaking) for my house to catch on fire.
the VAST majority of houses never burn down
it is ABNORMAL for a stock to multiply * 300% overnight
however, the damage taken by somebody who has written naked calls in the latter can be devastating.
so, again, the response was correct.
the issue is not about probabilities of event X occurring
the issue was that IF event X occurs, what is the risk? a naked put has defined risk. a naked call does not
now, i am ready for somebody completely ignorant of basic arithmetic to start bringing irrelevancies about volatility and lognormal distributions
that is concentrating on minutae while ignoring the proverbial options forest
it's absurd, but typical of sophist academic wanking, that is ignorant of real world trading.
So, suppose being short a call is like living next to a volcano that only erupts every 1,000 years, but when it does it destroys everything within hundreds of miles. Being short a put is like living next to a volcano that erupts every 10 years, but the damage isn't quite as bad (although it's still bad enough to kill you). You're saying you'd rather get killed every 10 years?
You're right. I was simplifying a bit, but had not spent much time examining lognormal graphs until you mentioned this. A morsel of useful information in this thread. Wow!
I'm sure this won't do any good, but whitster, "Risk Management 101" must take into account the probability of things happening, not just the possibility of them doing so.
When the first atomic bomb was tested, it was possible it would burn up the atomosphere of the earth. That doesn't mean they didn't do it because it was *possible*, it meant the probability was so low as to not impact their decision.
You make the claim that it's impossible to lose more then $10 if you sell a $10 naked put. It actually *is* for, to use your words, "N=(A lot of events)".
Let's say you sell an $80 put on KYO . Some major catastrophy happens in the US (like say the government can no longer make good on their bonds due to the astronomical debt we've issued) and the dollar is devalued to 1/100th what it's currently worth. That $80 put is now worth $800K of your cash. Sound like infinite risk?
The point is, lots of bad things *can* happen, "risk management 101" is taking into account what the odds are, not just what's possible.
whitster I am not ignoring the point. Simple arithmetic can lead sometimes to false conclusions. Are you familiar with the two envelope paradox? One envelope contains double the amount of the other one. You select randomly an envelope only to realize that it makes sense to switch because the expectancy is always positive.
Assuming that a liquid big cap stock is able to gain 300% overnight (something highly unlikely), why are you taking it to the extreme by thinking that a call seller runs more risk than a put seller?
Let me rephrase the question. I have sold OTM call options on 100 different liquid big cap stocks worldwide and my partner has sold OTM put options on 100 different big cap stocks worldwide. Who of the two have the greatest risk?
Assuming that a liquid big cap stock is able to gain 300% overnight (something highly unlikely), why are you taking it to the extreme by thinking that a call seller runs more risk than a put seller?
Let me rephrase the question. I have sold OTM call options on 100 different liquid big cap stocks worldwide and my partner has sold OTM put options on 100 different big cap stocks worldwide. Who of the two have the greatest risk?
you guys are still arguing about tiny leaflets and ignoring the forest
you keep talking about relative probabilities.
that's groovy, but it ignores that larger issue.
risk management (money management) is #1. you can't trade, if you blow out yer capital. 90% or so of traders do so in the first year. why is that?
MONEY MANAGEMENT
it doesn't matter about expectancy etc. when risk of ruin rears it's ugly head.
given N= (enough), the unexpected will be the death of the trader who fails to use proper position sizing, risk management, etc.
of course we can gobble this down to semantics but the original question was "which is riskier - naked calls or naked puts"
one has LIMITED risk.
the other has unlimited risk.
regardless of the relative probability of outcomes, most people would agree , definitionally speaking, that something (naked calls) that can wipe your account out in ONE trade is riskier than something that can't
the probability of it occurring or not occurring is tangential to that issue
put it this way. #'s arbitrary for the sake of explaining the point
trade a: 75% chance of making a small profit. 23% of taking a small loss. 2% chance of taking a hyoooge loss, that could blow out yer account
trade b: 65% chance of making a small profit. 33% chance of taking a small loss. 2% chance of taking a somewhat bigger loss, but still well within the paramaters that will avoid risk of ruin
ANY classic definition of RISK (which is the original question - RISKier trade) would say the 1st trade is riskier.
it's that simple.
all the other stuff is tangential. it's not a matter of which trade is "better" (subjective, and relative to goals, skillsets, etc.), has a higher expectancy, or any of that stuff.
the NUMBER ONE risk that any trader faces is blowing out his account. because when that event happens, no other event matters
50 successful trades in a row, followed by one account blowout = a loss.
and in the long run (we're all dead), the unusual "n" tends to be not so unusual.
so, clearly when you understand what the term RISK means, and you understand simple math, you concede that a trade that risks an INDETERMINATE/UNKNOWN amount of money is RISKier (by any logical and common definition of risk) than one that doesn't
step outside the myopic world that you keep playing in and view the LARGER picture.
nothing is riskier to a trader than the risk of losing all his money.
you keep talking about relative probabilities.
that's groovy, but it ignores that larger issue.
risk management (money management) is #1. you can't trade, if you blow out yer capital. 90% or so of traders do so in the first year. why is that?
MONEY MANAGEMENT
it doesn't matter about expectancy etc. when risk of ruin rears it's ugly head.
given N= (enough), the unexpected will be the death of the trader who fails to use proper position sizing, risk management, etc.
of course we can gobble this down to semantics but the original question was "which is riskier - naked calls or naked puts"
one has LIMITED risk.
the other has unlimited risk.
regardless of the relative probability of outcomes, most people would agree , definitionally speaking, that something (naked calls) that can wipe your account out in ONE trade is riskier than something that can't
the probability of it occurring or not occurring is tangential to that issue
put it this way. #'s arbitrary for the sake of explaining the point
trade a: 75% chance of making a small profit. 23% of taking a small loss. 2% chance of taking a hyoooge loss, that could blow out yer account
trade b: 65% chance of making a small profit. 33% chance of taking a small loss. 2% chance of taking a somewhat bigger loss, but still well within the paramaters that will avoid risk of ruin
ANY classic definition of RISK (which is the original question - RISKier trade) would say the 1st trade is riskier.
it's that simple.
all the other stuff is tangential. it's not a matter of which trade is "better" (subjective, and relative to goals, skillsets, etc.), has a higher expectancy, or any of that stuff.
the NUMBER ONE risk that any trader faces is blowing out his account. because when that event happens, no other event matters
50 successful trades in a row, followed by one account blowout = a loss.
and in the long run (we're all dead), the unusual "n" tends to be not so unusual.
so, clearly when you understand what the term RISK means, and you understand simple math, you concede that a trade that risks an INDETERMINATE/UNKNOWN amount of money is RISKier (by any logical and common definition of risk) than one that doesn't
step outside the myopic world that you keep playing in and view the LARGER picture.
nothing is riskier to a trader than the risk of losing all his money.
buy1sell2
you need to look up the definition of "RISK"
any trade that has a predetermined maximum loss, that you can set well within risk of ruin and max loss parameters for a trade (which is what owning a stock long can do) is LESS risky than writing a naked call, which has unlimited risk
again, you don't understand what the word "RISK" means...
which is kind of sad, that as so many discussion end up, people advocate for their petty (and false) definitions to hold true, and it ultimately just becomes a purely semantical wank
look up RISK in the dictionary.
better yet, start studying game theory, monte carlo simulations, etc. and then you will truly understand what the term means.
you need to look up the definition of "RISK"
any trade that has a predetermined maximum loss, that you can set well within risk of ruin and max loss parameters for a trade (which is what owning a stock long can do) is LESS risky than writing a naked call, which has unlimited risk
again, you don't understand what the word "RISK" means...
which is kind of sad, that as so many discussion end up, people advocate for their petty (and false) definitions to hold true, and it ultimately just becomes a purely semantical wank
look up RISK in the dictionary.
better yet, start studying game theory, monte carlo simulations, etc. and then you will truly understand what the term means.