put/call selling seem to make sense so far as of now.

traderlux · Aug 19, 2010

....good advice....

Quote from trefoil:

A few simple ways of losing your shirt. This being options, you could probably invent some very advanced ways of winding up busted & disgusted:

1. Selling naked options. Good way to actually be naked, homeless, etc.

2. Selling too aggressively way OTM options in a condor, and then freezing like a deer in the headlights when one of the legs start deteriorating rapidly and you can't bring yourself to close the position and limit your losses because you went for a year, or two or three, calmly collecting the premium without incident, and you really don't know what to do when suddenly you might actually have to trade your way out of trouble.

3. Thinking, re number 2, that "adjustments", the most common of which is selling some more on the side that's not deteriorating, will keep you from losing said shirt. Generally speaking, the sales won't bring in nearly enough to keep your shirt on your back if things continue to get materially worse. Even worse, the market could reverse, and you wind up now losing on the side you thought you'd just collect some more premium on, and so you freeze like a deer in the headlights anyway.

Selling options is extremely dangerous, no matter what. If you see a minus sign in the gamma column, be afraid, and be ready to ruthlessly limit your losses when things start going against you. You have to have a trading plan ahead of time for when things go too far against you. You should also have calculated ahead of time the theoretical max profit, theoretical ROI (based on margin needed to hold the position, NOT on the value of the options in the sale/spread), theoretical max loss, and max loss you are willing to take before you get out.
Back testing against the fall of 2008 is probably a good idea. Also against the spring of 2009, when sold calls would have got you into deep trouble, rather than the more usual and more usually hedged-against sold puts. The market can be irrational in both directions. Don't believe what you see in the skew. The skew is just a measure of fear, and is therefore irrational. Just because someone else got bit in the ass by puts doesn't mean you won't get bit hard from the call side.

noob_trad3r · Aug 19, 2010

Quote from ForexForex:

How is this a problem? so you get your stock called away. How do I lose my shirt?

Also why would I sell a put on a stock I do not want to buy anyhow.

ptrjon · Aug 19, 2010

Quote from noob_trad3r:

How is this a problem? so you get your stock called away. How do I lose my shirt?

Also why would I sell a put on a stock I do not want to buy anyhow.

Noob, there's a big difference between covered option writing and uncovered. I guarantee there's at least one person that sold naked calls on POT and is now waking up from a 2 day drunken stupor, looking in the yellow pages for a lawyer.

Just be careful when you think in absolutes. There are always multiple ways to make money in any market. There are also risks to every method.

noob_trad3r · Aug 19, 2010

Quote from ptrjon:

Noob, there's a big difference between covered option writing and uncovered. I guarantee there's at least one person that sold naked calls on POT and is now waking up from a 2 day drunken stupor, looking in the yellow pages for a lawyer.

Just be careful when you think in absolutes. There are always multiple ways to make money in any market. There are also risks to every method.

Well my post was about covered put and call selling VS just buying and holding stock.

diligentmoney · Aug 19, 2010

I was responding to trefoil on loosing your shirt. I don't have a problem in loosing every once in a while , it is part of doing business. What I am saying is that you should not be wiped out ever. You should never jeopardize all of you working capital ever. If you are loosing more than you are winning, you need to stop trading way before you loose all of your working capital or even come close to delepting your capital. You would re-evaluate your strategy. Sorry if I confused anyone but no one should loose their shirt in this business. However many are loosing their shirts especially in this volatile market but it can be avoided by implementing strick risk management rules. If you trade loosely without strict adherence to risk you will loose your shirt. Enough said on this topic I will move on.

Traderkip · Aug 21, 2010

I do not like the idea of NAKED Puts & Calls for sale; but I am
in favor of Deep OTM CREDIT SPREADS placed about 45-60 days
prior to expiration in order to receive PREMIUM INCOME......

Tradert Kip

newguy05 · Aug 21, 2010

Quote from ptrjon:

aware of your leverage.

This is all you need to know.

Make sure the underlying is good and your leverage wont get you liquidated if the market sneezes.. I have been doing this for a while, find it to be much less stressful and doesnt require a lot of time.

1) pick the companies you want to invest in long term and believe undervalued
2) sell cash covered(<--- important) naked puts, put a gtc buy order for $0.15, $0.10 15 days till expiration, $0.05 5days till expiration
3) if position moves against you, take delivery at expiration, then sell covered calls against it, until it's called away. rinse/repeat

Of course as with everything, it all depends on the underlying. I am doing it on nvda, imax, and etfc currently.

dcvtss · Aug 21, 2010

Quote from ptrjon:

Noob, there's a big difference between covered option writing and uncovered. I guarantee there's at least one person that sold naked calls on POT and is now waking up from a 2 day drunken stupor, looking in the yellow pages for a lawyer.

Just be careful when you think in absolutes. There are always multiple ways to make money in any market. There are also risks to every method.

Or even worse this one...right into expiration with no chance of recovery or ability to hedge.

KINGOFSHORTS · Aug 21, 2010

Quote from dcvtss:

Or even worse this one...right into expiration with no chance of recovery or ability to hedge.

HEH funny how the timed the announcement.

Well hopefully the seller had a spread position.

tradingjournals · Aug 21, 2010

Quote from newguy05:

This is all you need to know.

Make sure the underlying is good and your leverage wont get you liquidated if the market sneezes.. I have been doing this for a while, find it to be much less stressful and doesnt require a lot of time.

1) pick the companies you want to invest in long term and believe undervalued
2) sell cash covered(<--- important) naked puts, put a gtc buy order for $0.15, $0.10 15 days till expiration, $0.05 5days till expiration
3) if position moves against you, take delivery at expiration, then sell covered calls against it, until it's called away. rinse/repeat

Of course as with everything, it all depends on the underlying. I am doing it on nvda, imax, and etfc currently.

If I am not mistaken in your handle, I read that you used to sell premium on index/futures/etc using candors/straddles etc.

You seem to have changed business. What happened?