My example was hypothetical. I assumed one unit is 100 shares, i.e. $1 per one share.
Question about the naked puts selling with leverage
- Thread starter Kust
- Start date
My example was hypothetical. I assumed one unit is 100 shares, i.e. $1 per one share.
I was hoping that people who have experienced surges in volatility, for example in March 2020, will answer here.
They have seen themselves how brokers' margin requirements change in such situations.
I see. It is a very confusing hypothetical example. 50$ strike, stock going to 41$. Irrelevant buying power considerations...
A broker will reduce or even remove leverage for much less volatility than March 2020, even more so on penny stocks.
Anyway you would still be over exposed in nominal value and your account would be liquidated in any move against you or leverage changes.
Forget the end of the world with anarchists taking over, your account will be gone on a fed speaker fart after lunch.
dude, read the very first reply. It's not about your brokers margin handling.
You're overleveraged from the start.
You have 100$ and the shares are 100$. Stock is at 100$, vol is 50, you go 90 days out and sell the puts for 1cent.
Now it crashes towards 41$, vol probably goes to 90 and your put is worth around 9$. You're down 3600$
You would have been liquidated along the way and your reward for the risk is 4$...bravo
Seems like my initial post was too confusing. Now I make it more clear.
Hypothetically, I have $100 cash on account.
Currently, the stocks are $1 per one share. One option controls 100 stocks. If without leverage, then I can sell only two put options with strike $0.5. It covers with cash 100% the liabilities that I may potentially have.
I'd like to have 2:1 leverage and sell four put options with strike $0.5. Will this modest leverage survive in the event of a significant volatility surge?
all of the forumers are telling you no, then the answer is no, you won't survive. the broker either will send you a margin call or directly liquidate some positions to bring your balance to initial/reg t compliance.
Well...do the calculations.
There is no "modest" leverage in selling uncovered teenies, since these already feature insane convexity themselves.
Interesting that you bring up that date, because I did receive my first and only margin call when I was short puts. I was well capitalized and lightly leveraged. But in a black swan event you simply can't predict with any great certainty the impact of an explosion in volatility, any more than you can predict your survivability in a car crash. There are too many variables, and you will only know after the fact.
neogene is a moron. Put him on ignore.
if you are short otm puts naked into an event like March, several things fuck you:
1. the spot drops so your sensitivity to further movements increases (your delta and gamma go up)
2. Implied vols go up a lot, so your marks move further against you. (And if you are still out of the money, this exacerbates #1)
3. Because everyone starts losing money at once, brokers will increase the margin reqs. You get squeezed on both ends - your net liq goes down as your margin req goes up.
4. bid offer widens as volatility of volatility goes up.
And then the amount of leverage you have will multiply the above on your account (generally at geometric rates to your leverage).
it’s a really bad place to be. For taking this risk you are compensated in the form of options premium. I’m not going to comment on if the risk reward of that scenario is worth the premium. That’s for you to decide.
Just don’t over estimate your staying power in an event like March 2020 or feb 2018 or aug 2011 or aug 2008 or aug 2015.