Whoa whoa whoa!!! Vega?! That's a partial derivative. Let's keep this arithmetic. 
naked risk
- Thread starter ra1
- Start date
Although I'm not the one that said "the risk is the same," I assume your comment is directed at me. To say that the risk of an option can be defined completely with arithmetic would be insulting if this were not an internet forum predominately made up of people that trade from home. My Financial Engineering degree is pretty worthless if all you have to do to figure out your risk is look at the max possible mag of loss. Hell, most banks don't even pay much attention to that. They look at VaR (which admittedly has its drawbacks) which doesn't even take into account max loss if an event in the tails occurs.
As far as providing liquidity, that's what I do, and I'm handsomely compensated for it. My bread and butter comes from making markets in quantos and other exotics. So, although my compensation comes from providing liquidity, I'm pretty sure I am not trading against you. Even if I was, it is foolish to think that the people that provide liquidity for you are the ones you are making money from. If you happen to look at the counterparty house number on your trade confirmations, I think you'll find that most of your trades are against very large houses that make money by providing liquidity. Let me assure you, they are making money. If all your trades are against Goldman (for example), that doesn't mean you're taking money from Goldman. Goldman took money from someone else between your transactions.
No, the risk in being long 100 shares of stock is precisely defined; the risk in being short 100 shares of stock is not defined.
For being short stock/short calls, the risk cannot be quantified.
Hate to be nitpicky, but the risk is not precisely defined. The max loss is precisely defined. There is a difference between max loss and risk. Max loss is easy to see in most cases. Risk incorporates probabilities and is much more ambiguous.
But re: the post that you are referring to he's not saying that being long 100 shares is the same as being short 100 shares. He's saying that being short a naked call is like being short 100 shares. (which riskarb pointed out is not entirely accurate)
Execellent read, thanks for posting.
Warning chart:
