need broker for certain type of trade...

S

straddle_me

here is my situation. i would like to short index options with <10 days to expiry. they will be way out of the money. i just want to collect some cash from the premium.

let me get this out of the way: i know it is considered a risky strategy. i know that there is the eventual 'time bomb'.
i have planned for the situation as best i can, and am prepared to accept losses at some point. i have run statistics on returns for 10 years, and it makes money.....

here is my problem. i only have about $10k liquid for this. (i thought plenty since i only want to collect $1k in premium in those 5-10 days, and would have set stop loss orders entered immediately when i placed the entry trade). BUT my broker won't let me have access for naked short selling of options.

is there a broker, that with $10k in the account will let me do this?
 
1. If you are selling naked options than $10k is way to little. Most brokers require at least $100,000.

2. With less than 10 days to expiration, deep OTM options will probably have little or no value so you will have to sell a lot of contracts to get you $1,000. $10,000 is a drop in the bucket for the margin required and no broker would allow you to put them on the hook for all those losses and you get to only put down $10k.

3. Stop loss orders could be meaningless for risk management since an index can drop sharply on news and a naked option could shoot up in value quickly, especially puts with IV increases. That would wipe out that $10k and probably more rather quickly and no broker would let you put them on the hook for those losses.

4. Margin rules are meant to insure you have enough capital to absorb losses or cover your position. an SPX Put could have a margin requirement of $40,000 to sell one put. $10k just will not cut it.

5. Your desire to to trade naked index options on $10k shows a lack of understanding of risk managment and no amount of research on 10 years of data will compensate for that lack of risk management.

Quote from straddle_me:

here is my situation. i would like to short index options with <10 days to expiry. they will be way out of the money. i just want to collect some cash from the premium.

let me get this out of the way: i know it is considered a risky strategy. i know that there is the eventual 'time bomb'.
i have planned for the situation as best i can, and am prepared to accept losses at some point. i have run statistics on returns for 10 years, and it makes money.....

here is my problem. i only have about $10k liquid for this. (i thought plenty since i only want to collect $1k in premium in those 5-10 days, and would have set stop loss orders entered immediately when i placed the entry trade). BUT my broker won't let me have access for naked short selling of options.

is there a broker, that with $10k in the account will let me do this?
More...
 
Quote from straddle_me:

here is my situation. i would like to short index options with <10 days to expiry. they will be way out of the money. i just want to collect some cash from the premium.

let me get this out of the way: i know it is considered a risky strategy. i know that there is the eventual 'time bomb'.
i have planned for the situation as best i can, and am prepared to accept losses at some point. i have run statistics on returns for 10 years, and it makes money.....

here is my problem. i only have about $10k liquid for this. (i thought plenty since i only want to collect $1k in premium in those 5-10 days, and would have set stop loss orders entered immediately when i placed the entry trade). BUT my broker won't let me have access for naked short selling of options.

is there a broker, that with $10k in the account will let me do this?
More...

what happens if the dow drops or rises
a 1000 pts right at the opening? also would you be a patterned trader with 25k minimum?
 
i fully understand the risks. i am a derivatives marketer.

i'm just asking if anyone knows of a broker that will let me do it. pls don't insult me telling me i don't know the market or the risks. vol selling is a thoroughly researched strategy, structured notes are now coming out based on it.

i have run statistical models back 5 years. the largest 10d move is 167 points, and that wasn't even on 9/11.

i know that it would be risky. if i try to capture say $500 in the 5 days before expiration with only 10 contracts, i would have to sell options about 60 points out of the money. 50 points out of the money, in statistical term is the 93rd percentile. meaning, only 7% of the last 5 day periods before expiration would i ever be exercised. so i would sell about 15 contracts of 85 point out of the money puts to be safe, and put a stop order at 2x the price i sell at. even if mkt moves and i lose 3x my initial investment 1 out of 10 times, i'm still net positive.
 
re-reading your posts, i would like to add, i am fully aware that 'past performance is no guarantee of future performance'. i.e. i know that just because the largest 10d move is 167 points, there is no guarantee that it won't be 175, 200 or even 300 points next time.

but after watching the market for years, i find it very difficult to believe that my stop-loss order wouldn't get executed at under 3x my initial premium, especially if it is triggered at 2x my premium. yes, i know that is like inviting disaster, but i sit in front of the screen and watch the mkt all day, i would be able to monitor the action.

i would also be filtering out trd ops based on the skew and the recent mkt activity/direction. not going to blindly sell the puts...

i appreciate the concern though. i have learned tons from reading your posts over time, pls do not hesitate to let me know your thoughts.

basically, i don't have time or ability to put on spreads, straddles, etc... for my own account but i still want to make some money out of the mkt.


ps. zdreg, what is a 'patterned' trader? did you mean classified as a day trader under SEC regs?

thks all for your input.
 
just use options on futures... the margin requirements are a mere fraction of what they are for the cash index. so if you sell a call naked, and your short strike is in danger just go long the futures contract, for sp e-mini the margin for one futures contract is approx. 4K (long or short)
 
it doesn't matter if you know the risk. you are looking for a broker who doesn't.know the risk or doesn't know the regulations.

a dubious proposition.
 
Just for arguments sake, I believe the largest 10 trading day move since 1/1/1990 on the SPX was from 7/9/02 until 7/23/02. It was 16.28% or 155.13pts from 952.83 to 797.70. Using todays SPX close of 1267.32, a 16.28% move would be 206.32 pts taking you down to 1061.00. Pts mean nothing, percentages are more relevant.
 
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