Recommendations for a good book about selling options

[cnms2]

Any options trader knows that naked short puts are synthetically equivalent with covered calls. Covered calls is touted as one of the safest strategies, while selling naked puts and calls as very risky.

This contradiction arises from the lack of knowledge about position sizing (money management). Overleveraged positions are a recipe for trouble.

OTOH selling a put (or a covered call) is obviously riskier than selling a vertical put spread with the same short strike. The vertical's profit is also smaller, but you have the flexibility to taylor your reward / risk by selecting the long option strike.

Trading options, as well as any other asset, is very risky if you jump in it without prior study and with illusions of quick wealth. Learning and using money management, as well as having a trade plan before you open your position will increase your chances of success as a trader.

Quote from ChrisM:

I do not have problem if you say your opinion is addressed to beginners or unexperienced traders, but I have hard time to accept simple statements criticizing completely what I and others do for living.

In fact I strongly discourage traders of selling naked options. This is one of the most difficult strategies, but if you sacrifice a lot of your time and put hard work, you can do this.

 

[sle]

Why is everyone here talking about doing low-delta structures? If there is one thing about kurtosis is that you never know when there is going to be too much or too little of it. I would preferr selling closer to the money (i.e. 20-30% delta) and do some delta against it.

This said, sometime you see so much skew that it is possible to sell vega in the wing(s) to get long both theta and gamma - in that case, short wing(s) structure is an obvious choice.

 

[nlslax]

Quote from sle:

Why is everyone here talking about doing low-delta structures? If there is one thing about kurtosis is that you never know when there is going to be too much or too little of it. I would preferr selling closer to the money (i.e. 20-30% delta) and do some delta against it.

This said, sometime you see so much skew that it is possible to sell vega in the wing(s) to get long both theta and gamma - in that case, short wing(s) structure is an obvious choice.

Interesting comments SLE. Been thinking about that myself lately sticking with indexes (SPY/IWM/QQQQ). Gonna take some small positions (IC's or indiv CS's) with Delta's in that range, knowing adjustments may be necessary. As opposed to what I have been doing - taking small credits hoping not to have to adjust at all.

Thanks for the input.

 

[cnms2]

One argument against far out the money short option selling is that slippage is a high percentage of the premium you take in. The higher implied volatility is illusionary because it's not an edge, but just the pricing in of the probability for outlier events.

Obviously some might disagree in regard to out the money options' IV, probability, etc..

Quote from nlslax:

Interesting comments SLE. Been thinking about that myself lately sticking with indexes (SPY/IWM/QQQQ). Gonna take some small positions (IC's or indiv CS's) with Delta's in that range, knowing adjustments may be necessary. As opposed to what I have been doing - taking small credits hoping not to have to adjust at all.

Thanks for the input.

 

[ChrisM]

Quote from sle:

Why is everyone here talking about doing low-delta structures? If there is one thing about kurtosis is that you never know when there is going to be too much or too little of it. I would preferr selling closer to the money (i.e. 20-30% delta) and do some delta against it.

This said, sometime you see so much skew that it is possible to sell vega in the wing(s) to get long both theta and gamma - in that case, short wing(s) structure is an obvious choice.

Agree. I just wanted to say that whole discussion becomes too academic and artificial.

There is number of strategies, combined with variety of adjustments come to myriad of combinations.

Therefore there is no "good selling OTM" or "bad selling ATM". All depends on your plan. What is good for index might be killing for pork bellies and so on.

 

[cnms2]

As you said: there's no options strategy that works all the time. Analyze an underlying, form an opinion about its price and IV , if it's tradable select the appropriate strategy, develop a trade plan, and execute it. Keep track of what you did, and learn from it.

Quote from ChrisM:

...
Therefore there is no "good selling OTM" or "bad selling ATM". All depends on your plan. What is good for index might be killing for pork bellies and so on.

 

[toryj]

Quote from Dr_Risk:

You'll need this

I laughed.

 

[backflip]

I'm new to options so forgive me for my ignorance. I'm here to learn. I see a lot of negative posts about covered calls vs. credit spreads. I do realize that for the same $$ amount a spread technically has less risk than a cc and also has a lower breakeven point. Yet for the cc to experience max loss the stock must go to zero-unlikely but posssible; but for a spread, max loss is at the long strike.

Ex. DAKT trading at 29.90. August 27.50 calls bid of 3.6--max profit of $120 with BE of $26.30. Risking $2630 to make $120

Now a credit spread allows you a higher ROI with a lower BE.
August 25/22.50 put credit spread for credit of $20. Risking $230 to make $20. Seems like a much better scenario. But to make $120 you would do 6 spreads for a max loss of $1380. Still number wise its better than the cc.

Here's my point--if the stock is at $20.00 at exp, the cc will be at a loss of $630 and the spread at a loss of $1380. Sure if the stock is at $25.00 at exp the cc will have a loss and the spread a max profit but below this it is a far greater loss in the spread.

Now this of course is with no adjustments and perhaps you wouldnt do a spread on a stock like this, but I ran this scenario on a few different stocks and came up with the spreads having a loss of 2-4 times greater than the cc's at theroetical low points.

Once again, I am new and am probably missing some things here so I would enjoy some feedback and/or constructive criticism.

It just seems that the stock (from my ex) is much more likely to hit $20.00 than to hit $0.00

Thanks for any input

 

[jrlvnv]

Instead of spending your time figuring out options and writing and selling, you should remember why you buy stock in the first place.... hoping it will go up... if you get that part down you will realize that writing options is a waste of YOUR money cause you limit your upside. I would spend energy in buying stocks that have good growth and improving earnings and declining prices and low p/e... IMHO your time is better spent there

 

[riskarb]

Quote from lasner:

Hi I was wondering if anyone could recommend a good book about writing and selling options.

I'm not interested in buying options, I want to write them and sell them. Are there any books out there specifically for writing options.

Thanks

Read Taleb's book backwards.