Option selling. Too good to continue?

[Wheezooo]

Serious question from someone who has never traded real money but has been studying for a while.
Every so often, this subject about selling naked puts is discussed. The answer is always some version of " it won't end well" or "you will end up broke or bankrupt".
If everyone who sells naked puts goes bust, does that mean someone who buys otm puts and holds on will eventually make a fortune? Thanks for your insight.

That's a fantastic question and address's a peculiarity of options. Because of dynamic hedging, one sides p+l will not be the opposite of the counter-party to the original option trade. You can sell a put, have the market collapse on you, do nothing and get destroyed. I can be the buyer of that put, have the market collapse, and buy the underlying every tick down and find a way to come out a loser myself. That is not even that extreme of an example. Seen it many times, probably done it to myself a few times as well.

On the other hand. If you know what you are doing, you should come out an enormous winner if someone else is getting wiped out, and oftentimes, the market doesn’t let you be your own worst enemy. It just opens at an extreme and with vol blown out, and does you a favor. Seen it many times, and been the recipient of the benefit a few times myself.

So summing it all up. One, you are certain to get your ass handed to you, the other side, well that is subject to various factors, usually somewhere between the two I expressed above.

Hope that helped. Nice question since I’m fairly certain this thread was started by a troll.

-Merry New Year

 

[gaussian]

Serious question from someone who has never traded real money but has been studying for a while.
Every so often, this subject about selling naked puts is discussed. The answer is always some version of " it won't end well" or "you will end up broke or bankrupt".
If everyone who sells naked puts goes bust, does that mean someone who buys otm puts and holds on will eventually make a fortune? Thanks for your insight.

The theory of the strategy is that 70% or so of options expire worthless. So, naturally, selling puts/calls far enough out should yield fairly consistent, albeit small in this low vol environment, income.

The problem comes from tail risk. Selling options in a low vol environment at low delta is not telling the whole story. You are exposed to gamma (the change in delta) and you're exposed to vega. If the price of the stock jerks up gamma can suddenly explode causing a rise in delta and a massive decrease in your profit. If you sell an option you are short vega and so any rise in vega will also cause you to lose profit. Volatility is mean reverting, so at ATLs you can expect at some point soonish volatility will spike again to head back towards the mean.

It "sounds too good" because if you sell a 10 delta option you, in theory, have an approximately 10% chance of the option going ITM. The issue stems from the rapid change in price/vol that can occur in the mean time. That 10%, to a noob, looks pretty good. It's not so good when you sell vega at 15 and it shoots up to 30. The now infamous optionsellers.com case is a perfect example of this. He was selling DOTM NG options that worked forever (he built a hedge fund around it!) but had no unit hedges so he got crushed when vega suddenly spiked.

Imagine being short a dec ES put (not a bad idea in September of 2018!) you picked up at the end of September (~50 DTE or so) going into October 2018. One morning you're doing well, the next morning you're selling your house to cover the margin call.

 

[El OchoCinco]

you misunderstand.

You can make money selling naked options with the right conditions and understanding of volatilities and market analysis. Many of us here, including myself, have posted option trades being short premium and making money.

However, we are not 100% option sellers doing it blindly in any market environment or leveraging up an entire portfolio. That is why we say in this thread that the OP is heading towards a blow up. Because the lack of knowledge about all the other issues.

A good trader can sell puts in the right environment and make money and then adjust the strategy as market conditions adapt. That is why the suggestion that simply taking the other side and buying puts would then always make money because it ignores the same principles.

Most newbies who start of with naked put selling are in love with the returns and often start in a bull market so it looks like easy money Why bother studying implied volatility, the significant risk or what has happened in past markets with vol spikes and market sell offs and what happens to spreads on short puts etc..? That is the difference and why newbies blow out hard.

 

[Tony Optionaro]

I am almost ready to retire and trade full time

Please do, at least then we'll soon have a new Walmart greeter on the forum besides dozu or whatever his name was.

And what's your rationale selling OTM? Why not sell ATM and capture peak gamma? Why be a purely premium seller? Seriously, there is so many things wrong with your ''strategy'' that if I were you, I would invest my time reading all the previous threads on ET about premium selling, then look back at your trading and if you still want to sell 10d puts, you're beyond repair stupid.

 

[Tony Optionaro]

Getting out when VIX goes above 25 prevents your account from blowing up. You will sustain losses but you won't blow up

Hell, you're almost as smart as the guy who managed his naked puts by simply placing a stop-loss order where his premium received would cover his loss! There is just no way of losing! Elite traders indeed..

 

[smallfil]

Serious question from someone who has never traded real money but has been studying for a while.
Every so often, this subject about selling naked puts is discussed. The answer is always some version of " it won't end well" or "you will end up broke or bankrupt".
If everyone who sells naked puts goes bust, does that mean someone who buys otm puts and holds on will eventually make a fortune? Thanks for your insight.

For every option buyer, there is an option seller. How long they hang onto their positions varies. However, if someone lost a lot of monies selling options then, the buyer probably, atleast, earned a substantial amount of monies. In the opposite vein, when options expire worthless, the option seller pockets most or all of the premium he got for selling that option. OTM puts will give the buyer huge returns because it is like a lottery ticket. If you pay $10 per contract for an OTM option and somehow that stock moves in your direction by a huge amount, that same OTM option could now be worth $300 per contract. If you have 10 contracts, those 10 contracts cost you $100 but, is now worth $3,000.

 

[draft730]

As one premium seller to another. Cut your risk in half to allow for margin expansion. Also, you'd be better off with fewer contracts closer to the money. Your losses grow exponentially with more contracts. You can still do roll and adjust strategy even when closer to the market.

Do yourself a favor and get a subscription to Optionnet Explorer to test your strategy. After testing 2013, I swore off naked calls. No amount of adjusting saved the positions in a raging bull market

Thanks a lot

 

[Sweet Bobby]

I am a young trader...I have traded the last 3 years following a very simple strategy. Selling OOM puts in ES. Delta is between 0.10 and 0.14 with 50 days to expiration. Returns are exceptionally good (considering these years weren't the best for vol sellers. Specifically, +61%, -22% and +77% respectively. I don't want to brag about anything, I am just getting a little nervous. Do I take too much risk. Is the risk of blowing up, or sustaining a very big loss too great? Needless to say, I adjust the position if things turn out badly (roll over to a lower delta), but what about w/e? What about if anything quite unexpected strikes? I would appreciate any thoughts

Most people responding to you have never sold a put and don't have the balls to. Selling 10 delta puts at 60 days to expiration, then managing the trade at 40% maximum profit or closing the trade with 3 weeks remaining in the trade will work extraordinarily well. Try to use no more than 35% of your buying power. So if you have a $100k account, use no more than $35k for this strategy. Size is what kills when you are a put seller. Maintain your size and you will outperform the morons responding to you who simply don't have a clue.

 

[gaussian]

Most people responding to you have never sold a put and don't have the balls to. Selling 10 delta puts at 60 days to expiration, then managing the trade at 40% maximum profit or closing the trade with 3 weeks remaining in the trade will work extraordinarily well. Try to use no more than 35% of your buying power. So if you have a $100k account, use no more than $35k for this strategy. Size is what kills when you are a put seller. Maintain your size and you will outperform the morons responding to you who simply don't have a clue.

If it isn't the TastyTrade shill .

No mention of Vega, nor tail risk. Or do you just systematically sell 10 delta puts @ 60 DTE with no consideration of the greeks or their derivatives? Which one of us is a moron again?

 

[drcruz]

Serious question from someone who has never traded real money but has been studying for a while.
Every so often, this subject about selling naked puts is discussed. The answer is always some version of " it won't end well" or "you will end up broke or bankrupt".
If everyone who sells naked puts goes bust, does that mean someone who buys otm puts

Most people responding to you have never sold a put and don't have the balls to. Selling 10 delta puts at 60 days to expiration, then managing the trade at 40% maximum profit or closing the trade with 3 weeks remaining in the trade will work extraordinarily well. Try to use no more than 35% of your buying power. So if you have a $100k account, use no more than $35k for this strategy. Size is what kills when you are a put seller. Maintain your size and you will outperform the morons responding to you who simply don't have a clue.

Nice rules. What's your management for the losers? In the current market and its bullish bias, I'm using 1x loss (even with probability of a touch).