I disagree with this statement. It's okay to sell naked premium in the appropriate scale when the risk reward justifies it.
Never shorted options before
- Thread starter mikeenday
- Start date
I disagree with this statement. It's okay to sell naked premium in the appropriate scale when the risk reward justifies it.
So that would be a covered short put as opposed to a naked short put.
I'm probably beating a dead horse, but this statement has no merit.
If you use the same calculation of stop loss on any instrument, there is no difference between selling and buying.
You are confused by a basic statement (I think):
If you short something, you assume unlimited risk because there is no limit to how much price can rise against you. However, if you are long an asset, then your risk is limited to the value of the asset dropping to zero.
that's wrong too. all generalizations are wrong.
the problem with a spread is that is takes very little margin or capital. If you risk $5 to gain 50 cents, that's fine - if you really think there is only a 5% chance of it moving against you. But you can be wiped out thinking you had limited risk....
so don't think for a moment that spreads are limited risk. there are some STRONG caveats that need to heeded.
i think that's my biggest problem with spread sellers, the idea that are safer than naked selling. if you really examine it, the risk profile is the same
Very well put.
Years ago I asked an experienced options broker to explain to me why my program of selling puts - which I had carefully determined was statistically valid - would not provide a nice income stream.
"Because shit happens," he answered.
He was right. And when you are on the wrong side of that shit stream, you will quickly discover why theory and reality can be quite a different thing when you are living in the world of the CBOE.
Writing a put with the sense that it's okay to own the underlying if it collapses is a really piss poor excuse for making that trade, because you have no idea of what the market conditions may be if and when things collapse under you at a later date. Essentially what you are doing is giving the market the right to make a decision for you, and that is a real suckers bet.
It depends on what you're talking about. With options, selling puts nobligates you to buy the underlying and that's certainly less risky than just buying the UL outright. With equities, excepting EA's and takeovers, they drop far faster than they rise and if you're a long only type, you miss out on some spectacular money amking opportunities.
Quote from adamm2:
I'm probably beating a dead horse, but this statement has no merit. If you use the same calculation of stop loss on any instrument, there is no difference between selling and buying.
No argument there. The UL can blow thru you stop but that happens on either side
You are confused by a basic statement (I think):
If you short something, you assume unlimited risk because there is no limit to how much price can rise against you. However, if you are long an asset, then your risk is limited to the value of the asset dropping to zero.
I have a problem with the infinite loss argument that peeps use against shorting. With GOOG at $580, there's an awful lot of pain down to zero. It and other stocks aren't going to infinity. Can you name one that ever has? Not much melts up
A lonnnnng time ago I had a mentor. I once presented him with what I thought was a well thought out theory about gold, energy, interest rates and asked him why I was having trouble with some of these trades. His response was simple: "Understanding it will only confuse you. Just trade the price action that you see not the action that you hope to see. " He was right.
