Never sold Naked Puts until Friday accidentally. IBKR Question.

What on the world are you talking about??

Selling a put is 100 percent risk equivalent to buy writing..Reversal Conversion 101

Scataphagos said:
That's only part of it.

The notion of the "P/L being the same" depends upon the question asked. The OP who stated "Naked puts are the same as covered calls" is correct under 2 scenarios. We'll use a "portfolio" of $100K to illustrate... writing covered calls on the entire portfolio equal to the $100K notional value or 10 naked puts on a $100 stock, $3K in premium collected in either case...

Scenario where they are the same risk...

#1. "Cash backed" puts... all of your $100K "portfolio" is in cash to settle your put "just in case"... Market crashes 50%... you use your cash to settle the puts and now own $50K of that stock.

#2. Individual stock you wrote puts on takes a big hit and the rest of the portfolio doesn't (not a market crash). You liquidate your portfolio for the cash to settle your puts and you now own $50K of that stock.

Scenario where they differ...

#1. With writing covered calls on the full $100K of the portfolio, you now have a $50K portfolio

#2. Instead of writing covered calls, you write 10 naked puts on a $100 stock... and the market takes the same sudden hit of 50%. Then where are you?

a. Your portfolio is $50K

b. But you also OWE $100K to settle your puts. You liquidate the remaining $50K of your portfolio, but you still owe ANOTHER $50K on the puts!

The original statement as made, "naked puts are the same as covered calls" is not correct in the larger sense of risk.

You can't get wiped out writing covered calls. In fact, most long term buy and hold investors should be doing it all the time (tax considerations, excepted)!

Writing naked, either puts or calls, is potentially playing with fire! Lots of examples of "pro" investors getting wiped out with naked writes.
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taowave said:
If I am reading you right,you would NOT

Sell naked calls..
Ratio the upside..
Be net short puts,underlying notional greater than capital...
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Correct. If I do sell a call - say, as a defensive strategy against a put that's really tanked - I'm also going to buy a cheap call at the same time. At this point, it's pretty much a spinal reflex. :)

If vol explodes would you sell a straddle or prefer to trade Flys/Condor type structures,and how big would you get relative to your capital??

Im guessing you trade Reg T..
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Yeah, no portfolio margin. I suppose Reg T gives me enough slack that I could go over notional by quite a bit relatively safely, but I just don't feel like playing with margin if the market tanks. As part of my risk management, I always have a few cheap back ratios running, so I have some protection against it - but I'm still in the process of figuring out the whole picture, feeling my way for what I find reasonable vs. too risky.

If I see high vol, I'm going balls to the wall selling puts and collecting those juicy premiums. Still keeping it to 100% of notional - I think I've gone as high as 110% at one point, just because MSFT looked so good that I couldn't resist.

No condors for me anymore - they move way too slowly. As to flys, I really like the idea; in fact, if I could master them, I believe they'd make up a very effective part of trading for me. But I'm not there yet, nor making a whole lot of progress on them. Learning directional trading seems to be the big sticking point, and that's a tough one.
 
taowave said:
What on the world are you talking about??

Selling a put is 100 percent risk equivalent to buy writing..Reversal Conversion 101
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I agree. The only caveat is that you can leverage higher with naked puts because of margin allowances. And you most definitely CAN get wiped out doing Buy-Writes. Just leverage up 3X (normal margin) and watch the stock tank by 30% plus premium. BOOM wipe-out.
With Naked puts, the margin rules require you to have sufficient margin to cover a 20% move in the stock (I think that's right, but brokers can increase it). If you're selling OTM puts at 15% from Stock Price, that only requires margin of 5% of stock price. If you're fully margined, then the stock only needs a 20% + premium move and you're zeroed. You're not allowed to margin a CC that much.
But that's not a genuine risk inherent to the position, only to the trader's ability to size up. If the position sizes are equivalent number of options between the CC and Naked Put, then outcome is the same.
Yes, basic synthetics.

One case that I'm not clear on is massive vol increase. I know that expiry outcomes are the same, but I'm not certain that the two positions are equivalent throughout a trade. Though they're probably close.
Another variable is a big dividend pre-expiry.
 
Off the top of my head,there may be a discrepancy if a stock becomes impossible to borrow with buy in risk(massive borrow cost,I.e 80 percent)

misterkel said:
I agree. The only caveat is that you can leverage higher with naked puts because of margin allowances. And you most definitely CAN get wiped out doing Buy-Writes. Just leverage up 3X (normal margin) and watch the stock tank by 30% plus premium. BOOM wipe-out.
With Naked puts, the margin rules require you to have sufficient margin to cover a 20% move in the stock (I think that's right, but brokers can increase it). If you're selling OTM puts at 15% from Stock Price, that only requires margin of 5% of stock price. If you're fully margined, then the stock only needs a 20% + premium move and you're zeroed. You're not allowed to margin a CC that much.
But that's not a genuine risk inherent to the position, only to the trader's ability to size up. If the position sizes are equivalent number of options between the CC and Naked Put, then outcome is the same.
Yes, basic synthetics.

One case that I'm not clear on is massive vol increase. I know that expiry outcomes are the same, but I'm not certain that the two positions are equivalent throughout a trade. Though they're probably close.
Another variable is a big dividend pre-expiry.
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I also sold a naked NIO option last week. It cost about $2K of margin per contract naked. It's a very popular strategy but you need to sell the right strike price so there's a low probability that it will hit your level.
 
You should be selling the put to maximise return as opposed to minimising the probability of touch..


john demp said:
I also sold a naked NIO option last week. It cost about $2K of margin per contract naked. It's a very popular strategy but you need to sell the right strike price so there's a low probability that it will hit your level.
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