Never sold Naked Puts until Friday accidentally. IBKR Question.

[vanzandt]

On Friday I sold 25 NIO puts by accident that worked out well. They were near $5 I knew was a blip and closed them out near the Close cheap. I thought you have to have special permission to sell naked puts. I buy and sell covered calls or puts because there is a risk limit. The privilege of selling naked calls or puts is best left to trading gods like Destiero and others. Schwab and Etrade you need level three permission. How do I get rid of access to naked calls and puts with IBKR.

Pretty sure IB has a deal set up with ET here that when an 'Elite-Trader' exceeds 100 "likes", they automatically bump you up to level III on options.
(That and they lock up the cash in your account required to buy the stock at whatever strike you sold.)

 

[BlueWaterSailor]

Not at all. With covered calls your "risk" is that you miss out on capital gains above the strike price in exchange for the premium you collect. With naked puts, your risk... while not unlimited.... is still very high should the stock have a catastrophic decline.

Wrong. Covered calls and naked puts have exactly the same risk profile.

If you are short a 100 put for $3 and the stock drops $50, you're going to get assigned for a loss of $47/share.
If you are long stock at 100 and short a call for $3, and that stock drops $50, you have lost $47/share.

Try looking up synthetics before you make assertions like this again.

 

[Option_Attack]

Short Puts do have the same risk profile as CCs. If the stock opened down 50% or whatever you'd lose the same (if ATM strike) as holding the stock (minus the prem).

As has been mentioned, problem comes in when over-leveraged. For example, with NIO at about 47 current Reg T margin for a 45 short put is about $1100. Compare that with overnight margin for 100 shrs at $2350. So you could short twice as many puts and get into big trouble easily.

 

[lindq]

Wrong. Covered calls and naked puts have exactly the same risk profile.

On paper, that may well be true. But in reality, they are different animals and should be treated accordingly.

In a covered write, you are making a decision to open the trade NOW, at the present time, given current information of the stock and market conditions.

Conversely, with a short put, you are risking being put the underlying at an unknown time in the future when you may LEAST want to be holding that stock.

And as Option_Attack wrote, a serious problem with short puts is that unsophisticated traders can easily get sucked into an over-leveraged situation, putting their financial future into jeopardy.

We are all guilty, at one time or another, of ignoring worst-case scenarios that can be damaging. But in the case of short puts, that ignorance can be devastating, and is the reason why most brokers provide clear warnings and require additional trading approvals.

 

[Scataphagos]

Short Puts do have the same risk profile as CCs. If the stock opened down 50% or whatever you'd lose the same (if ATM strike) as holding the stock (minus the prem).

Both you and Sailor are correct... as far as it goes. Like in the situation of one or a small number of stocks where your capital account is sufficient to handle any adversity they might suffer.

But in the scenario where the option player gets "bigger enough"... doesn't even have to be leveraged (and by leverage I mean "notional value of your option position(s) being greater than your investing capital)... the potential loss for writing puts can be much greater than writing covered calls. (And you already know the temptation to "go bigger" after making a bunch of that "easy low/no risk" naked premium money )

But as I don't want this to turn into a pissin' contest, I'll back out leaving you and sailor having the last word. After all, your statement is correct.... up to the point you made.

 

[BlueWaterSailor]

On paper, that may well be true. But in reality, they are different animals and should be treated accordingly.

In a covered write, you are making a decision to open the trade NOW, at the present time, given current information of the stock and market conditions.

Conversely, with a short put, you are risking being put the underlying at an unknown time in the future when you may LEAST want to be holding that stock.

With a covered call, your underlying risk is exactly the same - because the chance of that adverse event in which you "LEAST want to be holding that stock" is exactly the same. Whether you're holding it and it drops, or it drops and you get assigned, you're still taking the same loss.

And as Option_Attack wrote, a serious problem with short puts is that unsophisticated traders can easily get sucked into an over-leveraged situation, putting their financial future into jeopardy.

By that reasoning, if someone writes a call against their stock and then jumps off a building, the covered call caused their suicide. If you are getting "sucked into" taking stupid risks, then that's a problem that's going to destroy your account regardless of what strategy you use.

I will note that I have somewhat of a preference for shorting puts rather than writing covered calls, because the former lets me scalp vol on short timeframes while the latter ties me to a given underlying. But that's a much more subtle difference than anything being implied here.

 

[cesfx]

Maybe a difference on extrinsic value before expiration?
Like a naked put running into bigger pnl drawdowns due to extreme volatilty, Vs underlying dd.

 

[Option_Attack]

Maybe a difference on extrinsic value before expiration?
Like a naked put running into bigger pnl drawdowns due to extreme volatilty, Vs underlying dd.

Little hard to visualize without graphing it, but IV changes after putting the trades on effect short puts and CCs the same (assuming same ex and strike). They are still synthetics.

 

[taowave]

Surely you jest..

On paper, that may well be true. But in reality, they are different animals and should be treated accordingly.

In a covered write, you are making a decision to open the trade NOW, at the present time, given current information of the stock and market conditions.

Conversely, with a short put, you are risking being put the underlying at an unknown time in the future when you may LEAST want to be holding that stock.

And as Option_Attack wrote, a serious problem with short puts is that unsophisticated traders can easily get sucked into an over-leveraged situation, putting their financial future into jeopardy.

We are all guilty, at one time or another, of ignoring worst-case scenarios that can be damaging. But in the case of short puts, that ignorance can be devastating, and is the reason why most brokers provide clear warnings and require additional trading approvals.

 

[OptionsOptionsOptions]

Naked Puts are identical to Covered Calls.

Not at all. With covered calls your "risk" is that you miss out on capital gains above the strike price in exchange for the premium you collect. With naked puts, your risk... while not unlimited.... is still very high should the stock have a catastrophic decline.

"Writing naked" is potentially very high risk! (Like trying to pick up dimes in front of a steam roller.)

Naked Puts are identical to Covered Calls in terms of risk/profit. The OP's fear of Naked Puts is unfounded. He trades Covered Calls due to the "risk limit" - but the risk limit is the same for both type of trades.



AAPL at $119.39

COVERED CALL

• Buy 100 shares @ $119.39 = $11,939
• Sell 1 120.00 Dec 18,2020 call @ $3.85 = $385 credit
• Total debit = $11,554

NAKED PUT

• Sell 1 117.50 Dec 18,2020 put @ $3.20 = $320 credit

AAPL to $150.00

• COVERED CALL $446 profit
• NAKED PUT $320 profit

AAPL to $90.00

• COVERED CALL $2,554 loss
• NAKED PUT $2,430 loss