Question Regarding Option Selling?

Thanks.

I am aware of what the Greeks are and how they effect options prices.

I am a beginner with regards to options trading and am just unsure as to the manner in which option contracts are sold.

Don't worry though, I have zero intention of starting off writing naked options contracts.
 
Quote from Joeydisco:
So when I buy an option contract after originating it, is it then cancelled completely?
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You have no position assuming the exit trade is the same symbol, expiry, strike, and exchange (i.e. same everything). If anything is not the same, you end up with two positions, one short and one long.
 
good.. i wasn't trying to infer that you were stupid or a total noob.. because i am.. haha.. and i hate to see people learn the way i always do.. don't be scared of reading.. it pays well in the long run... if your just trying to learn the mechanics of it.. try opening a paper account with trade king or something and just work your way around.. put some butterflys on debit spreads ccredit spreads etc.... blow yourself up a couple times on paper first..... and don't be mistaken some of the largest possible gains in the market are through buying wing options... sometimes people get mistaken by the whole options selling thing... yes market makers and professionals and retailers alike all sell options and sometimes dynamically hedge. . iron condors. . reversals conversions etc.. (look all the things up that you don't know when i talk ) but what i'm trying to say is.. options can never price rare events.. and as well rare events happen more often then humans predict... and on the same note... the option pricing model most used.. BSM is based upon a probability distrobution of stardard devation moves... 68 Percent of all moves realitive to past volatiltiy are within one stardard deviation... 98 percnet of all moves are all within 2 stardard devations... that being said.. how do you price something correclty that happens less then 2 percent of the time... ? you can't the sample of data is so small you can't extroplate anything rational about it... so therefore don't sell way otm (out of the money) wing options. . they are two much risk for what they return... that should tell you something right there... either bet small bleed slow and captialize on rare events.. or sell more near the money options that you hedge with either other options or the underlying if needed.. just my thoughts here.. jacked up on some coffee in starbucks.. haha thank you..
 
No lie.. I'm in recovery in AA... No lie.... I dont smoke drink do drugs.. Any of the above... Obviosuly there are some lagging effects. . Haha and no i didn't get sober 15 minutes ago.. Haha. Nothing like meeting the nice crazy people in meetings... Celebs.. Hedge fun managers.. Drug smugglers human traffickers... Story time is always interesting :)
 
Quote from Joeydisco:

Don't worry though, I have zero intention of starting off writing naked options contracts.
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Naked Puts is the same as Covered Calls, so you don't have to worry about those. Naked Calls is unlimited risk so I would consider a Call Credit Spread instead.




:)
 
I think you ment to say cash secured puts. Not naked.

The main risk of selling naked puts, is the temptation to sell A LOT more contracts than you have cash for.
Why?
Because there are no margin fees charged to your account daily, as there would be if you actually bought more stock than you had money for.
HOWEVER, just because there are no margin fees for borrowing more cash than you have, and using it to trade more stock contracts than you can afford,... does NOT mean there is less risk.
The risk of being on naked put margin, is just as real as being on any other type of margin.
That being, your stock drops and you are now at risk of a margin call and a potentially severe loss of account value.

Most people who get killed in the market don't get killed simply because their stocks drop,.... because stocks can eventually recover.
They get killed because they are on "excessive" margin, and now because of the stock drop, they can not wait for recovery.
They are forced to sell at a loss, at the worst possible time.
The potential to borrow cash without being charged any fees, tempts naked put sellers to borrow more cash then they might normally borrow.
However, if you are a disciplined investor, that issue may not be one of excessive concern for you..... maybe.
 
<<< Most people who get killed in the market don't get killed simply because their stocks drop,.... because stocks can eventually recover.
They get killed because they are on "excessive" margin, and now because of the stock drop, they can not wait for recovery.
They are forced to sell at a loss, at the worst possible time.
The potential to borrow cash without being charged any fees, tempts naked put sellers to borrow more cash then they might normally borrow. >>>


Just as a side note.... many, if not most, "bull put spread traders", are also on super massive POTENTIAL margin, but don't even know it.
In fact, their potential degree of being on margin, makes naked put sellers look conservative by comparison.
And just like naked put sellers, there is no charge for the additional risk they expose their accounts to.
Hence, many ignore the potential risk..... UNTIL their stocks drop.

However, unlike naked put sellers, spread traders won't be getting any margin calls to worry about.
Instead, in the event of a severe market drop, their account value may quietly be devastated or wiped out, without any worries about a margin call.
WHY?

Because they won't be on any margin, unless they attempt to buy their stocks. Since most spread traders can't buy 80% of their stocks, if they drop to or between their strikes, no attempt to buy them will be made.
Hence, once their stocks drop to or between their strikes, they must close their spread trades for a potential loss.
And the negative affect on their account value will be massive in many, if not most cases.
How massive mostly depends on where "between" their strikes, they closed the spread trade,.
And close the spread trades they will, as most do not have the cash to buy 80% of the stocks they invested in.
(Of course, the above assumes a portfolio composed of only spread trades.)
 
putty man.. i hear you say repeat this ideology alot.. as there is alot of truth to it.. i feel you are saying it many times to reassure yourself that you are doing the right thing... you could say that just as many credit spreaders are putting themselves at a risk of ruin as premium buyers.. or even cash secured short puters could as well be selling put on things like netflix.. throwing out ambiguities about particular traders and their majorities basically sterotypes.. and sometimes i don't think you get it.. either through cash secured.. naked, spreads.. pure premium buys.. if you don't know your risk .. it will find you... your a bit infanatical about it.. to get your point accross i don't think you need to start talking in what you "think" certain style traders are doing... its sort of pointless.. it devalues the point that your trying to make about selling cash secured puts as opposed to naked leverage short put selling and its relations to selling credit spreads..
plus you give clowns like Dan Surely a hole in your story to punch a hole through.. and you know how much we all care about what he says.. haha
 
I am NOT trying to discourage investors from selling bull put spreads.
I thnk it is an excellent strategy that should potentially be part of every investors inventory of strategies.
I use it myself.
I just want new investors to be aware of it's potential risks.
As many are not aware of how quickly your account can and will be devastated, in the event of a severe market down turn.

I think may new investors get into the strategy, because of the safety they think it offers.
And indeed it does offer some excellent safety benefits.
But they need to know about it's dark side as well.
That is what my discussion is about.
Making them aware of it's potential darkside.
That not all 2 point or 3 point or 5 point spreads carry the same potential risk.

A $50 dollar 1 - 5 point spread is considerably more risky to ones account value, than a $15 dollar 1 - 5 point spread,... in the event of a severe market drop, as you may be able to buy your $15 stocks and wait for a recovery. That may not be true for a similar $50 spread.
Too many novice investors don't realize that, as they think all similarly spaced spreads are equal,.... and later find their accounts devastated during market downturns.
They are forced to sell for huge losses, because they don't have the "cash and choice", to buy those high priced strikes, and hold for a recovery.
That is the dark side to bull put spreads.
 
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