Nickel Options

[JohnGreen]

MegaDeth,
In the case of indexes, you are probably correct about a 40% drop, but just because something has never happened does not mean it is impossible. Mr. Taleb has had much to say on that topic-- Black Swans--, and his logic is basically sound, I think.

Nevertheless, even if the indexes never ever drop 40% in a month, my second statement about margin and returns still applies. I think these option are generally closed out so people can free up margin and move on. The SPX market makers are better than most people think in terms of the real price for their options (now they owe me one!!), but they do like to squeeze out that last nickle. You will get the midpoint on a spread occasionally, but most of the time you have to give up a little. If you write SPX options DOTM, you will have to wait and let them expire 99 times out of 100.

 

[jack8031]

Quote from traderum:

Many option sellers don't know this fact:
you can close a position earlier than the expiration date by simply buying the same options...
Did you know that?

Most of the time when put goes against me by 200%, I usally close it,but at that time ,I was in china and far way from computers.

 

[spindr0]

Quote from JohnGreen:

Nevertheless, even if the indexes never ever drop 40% in a month, my second statement about margin and returns still applies. I think these option are generally closed out so people can free up margin and move on.

If there's a drop of say 100 points or so AND a spike in IV, those naked nickel puts could wreak havoc with one's margin.

 

[donnap]

Quote from spindr0:

.. and I'm only 36 years old now

fubar

 

[KINGOFSHORTS]

Quote from MegaDeth:

Why is it bad selling them for a nickel? Often times, the market fall needed for these options to even end up close to the money is just not possible, well historically and statistically. But clearly thousands of these are bought and sold everyday so they appear to be priced at the fair value.

It is bad LTCM style if you do not have the capacity to take delivery of security and the black swan even causes the price of the security to drop enough below the strike price to initiate an instant fed call.

Only sell the nickels if you are willing to take delivery at a fixed price in the future and have the capacity to meet any margin calls and/or pay for the security in full or enough to be at levels that would meet margin maintenance requirements.

 

[stock777]

Quote from traderum:

Many option sellers don't know this fact:
you can close a position earlier than the expiration date by simply buying the same options...
Did you know that?

Wow, did you figure this out or was it handed down by a relative that used to work the floor?

With his broom.