Selling Naked Puts

Quote from optioncoach:

You have to remember that in any strategy you will have to take losses. Better to take small losses than big losses. With naked puts your risk is not unlimited but it is quite significant and much larger than your initial margin. As a sort of beginner I just caution you against naked puts on the indexes.

If you are dead set on doing them, then I do recommend doing credit spreads instead of naked puts. The risk is limited and controlled since you can decided how much of your portoflio to allocate (i.e. 20%) and decided on how wide you want the spreads. Volatility risk is greatly reduced as a result of the spread and so is delta risk. Like I said, naked puts are not really the best place to start so look for other strategies, but if you are determined to do it, consider and compare credit spreads.
More...

Thanks Optioncoach

I am considering other strategies as well.I am also actively reading yout thread on SPX credit spread.

On a credit spread you have a debit and a credit. I consider debit as a loss and if you add up all your losses ,probably you have blown away your total account. This argument is probably like glass is half full or half empty.

Thanks
 
Quote from vhehn:

as long as you don't sell any more puts than you have cash to purchase the index if need be you have no more risk than being long the index. the problem with selling puts is that it works. it works so well that you are seduced into piling on the leverage and eventually an event happens that takes you out. if you are disciplined enough to resist that urge to splurge i would just continue on because it sounds like you are doing fine.
More...


Thanks vhehn

I follow and implement strict money management rules. Being deep out of the money, most of the time I am always very comfortable. and hardly any corrective action is required. As I said I have withdrawn profits and this amounts to my original capital.

My question is why selling naked puts is not widely followed. Is this just fear of somethig that has a very low probability of happening.

Thanks
 
I agree with vhehn. I've done lots of NPs for years. It does work.

The thing is, IMHO, it is nothing more than a leveraged long play. It can be a little better, and certainly not worse than just going long the stock.

BUT you have to do it with an investor's mindset! Like v sez, you get too greedy and use too much leverage to try and nail big short-term gains, then you WILL suffer for it - sooner or later. This is guaranteed...

Find *good* stocks (at least ones with earnings growth and maybe some divs). Keep the leverage down. Have patience, but also have a getting out point.

The main point is,if you are careful and work hard at it, you will have ups and downs but you will do fine and your account will grow.

If it works for you and you understand ALL the risks and nuances, then go for it!

Good luck.

C
 
Quote from vedanta:

My question is why selling naked puts is not widely followed. Is this just fear of somethig that has a very low probability of happening.

Thanks
More...
I think a lot of it is that, back in the day, you were allowed to use much more margin for NPs and during one of the market crashes a few years ago a bunch of traders and brokers got wiped out (ole Vic Neiderhofer).

Yes, it's the same R/R as covered calls, but brokers don't push NPs because NPs can use more leverage so more risky in that sense...and there are far fewer commissions to grab!
 
Few comments:

When you say you have 50% invested in these naked PUTs, I hope you mean that your margin requirement is 50% of your capital.
I would add a money management rule that you should never exceed 80-90% of your capital in margin. You should plan your exposure such that this limit will only be triggered by a sharp move against you.

Note that the indices are positively correlated and if the world markets will fall, you'll lose on all of them. If there is an external shock like a major terrorist attack, bird flu pandemic, etc. you might be wiped out in a day!

To partially overcome the positive correlation, I would either diversify some of your positions to options on commodities or replace half the naked PUTs with naked CALLs. This will not save you from disaster, but improve your chances of survival.

Remember that above a certain level of risk, your blowup is just a matter of when, not if.
 
Just a though about option selling. Right now the VIX is around 11. I used to sell puts with great success when the VIX was at 35-40. When the market changes as a trader you must adapt. With the VIX at 11 the advantage is to the holder of the long option. What I have done is learned how to use options as insurance that allows me to trade more aggressively. The best part is that I am starting to turn my "insurance" from a cost into a profit centre.
The day will come again when I can enjoy the glee that comes from having an option expire worthless. Until then I will enjoy exploiting change in volatility to sell my long options at a profit.
 
Choad

Thanks for your reply. I donot write naked puts on stocks. By experience I have learnt that it is better to stick to indices and futures.

Optionwizard

Yes I would like to sell put options on commodities, but as yet donot know how to go about it. IB probably does not have anything so I might need another broker. Any comments?

Your idea about naked calls is good as well. Any event will never affect both calls and puts. I am going to try this as well. Will I save on margin requirement if I sell call and put on the same underlying and same expiry month? There must be some name to this strategy.

Zftrader

Thanks for the idea about VIX. Where can I find this figure live or delayed?
 
Vedanta,

Regarding commodities, IB lets you trade options on debt (bonds/notes) and Eurodollars.

The strategy is called a "short strangle". The margin is worst case of either PUTs or CALLs plus the premium of the other side, but look at IB site for accurate definition.


Quote from vedanta:

Optionwizard

Yes I would like to sell put options on commodities, but as yet donot know how to go about it. IB probably does not have anything so I might need another broker. Any comments?

Your idea about naked calls is good as well. Any event will never affect both calls and puts. I am going to try this as well. Will I save on margin requirement if I sell call and put on the same underlying and same expiry month? There must be some name to this strategy.

Zftrader

Thanks for the idea about VIX. Where can I find this figure live or delayed?
More...
 
You must log in or register to reply here.
Back
Top