Selling Naked

[aphexcoil]

Quote from ktm:

We can point to many LTCMs, Neiderhoffers, Barclays and the list goes on. Some of these guys made big obvious mistakes. Others were just unlucky. Some were doing dumb things for many years and it caught up to them. Neiderhoffer actually blew up because he tried to branch out into unfamiliar territory (Thai currency) and then tried to make a desperate all-or-none naked sell to get it all back. Greed may have gotten in his way, but for 17 years, he held it together - and he continues to sell naked today. Despite the real story, he is purported to be a naked seller who blew up.

Is this the same guy that was working for a bank or something and he was turning in receipts and covering his ass with miles of paperwork until the shit hit the can and the president came in asking, "Where is this 10 million dollars we're missing?" Then apparently, if I remember correctly, he played cool and said he had to call his guy in thai about some exchange rate conversions that were worth millions apparently but then skipped town thereafter?

There is a link somewhere .. it is a fascinating story about how some trader kept covering his ass by doing more exotic things until he blew up and basically took the small firm with him.

 

[ktm]

I hedge with the ES against the SPX. It's hard to hedge specific equities sufficiently without drastically reducing your rate of return IMO. I would hold an underlying and use the opts to hedge (selling puts and calls, etc), but not the other way around.

 

[ktm]

That was a different guy who blew up. There have been a few bank trader types who have lost serious jake in currency markets and hidden it for a while before making one too many wrong bets and losing a mountain of money.

The guy I was referring to is Victor Neiderhoffer. Much has been written about him and his famous exploits and eccentric behavior. Search the name here on ET and you'll find a few recent threads about him and links to his story. He's a quant who blew up in 97 and is now trading again. He ran his own fund and had over 100M when he got complacent and made some mistakes. From the early 80s to 97, I think he averaged about 40% a year, give or take...mostly from selling naked index opts.

Max Ansbacher has been doing the same with mixed results since 94. He has about 60M under mgmt now and his returns are not bad overall, although when he has a bad month - it's a really bad month.

 

[Option_Attack]

FWIW there is a technique based on naked call writes that has some built-in hedging. It should only be done IMO by experienced traders/investors with at least $100k for a portfolio. It has some characteristics of Covered Calls, but doesn't necessarally cap your gains.

You select at least 15 stocks that are sector leaders with good earnings growth and you buy equal dollar amounts of each stock. You then sell Calls on 15 stocks in the same sectors that are WORST in the group, with declining earnings, crappy Zack's ratings, etc. You need to adjust your list every so often.

If the general market rises your long stocks should do as well or better than the stocks you wrote calls on and your stocks are not capped by calls on them. If the market declines, at least you get the benefit of the short calls. If one or two of the short call stocks get a buyout or whatever and zooms, you will lose on those and have to close them out, but you still have the other 13 long stocks and 13 short calls to help ease the pain.

This is not perfect and takes a big account and some work, but I have seen some claim this generates 30%+ year after year with few big drawdowns. My account is too small to do this correctly, so I haven't tried it.

 

[iceman1]

Quote from aphexcoil:



Great, so now you expose yourself to both a rally tail and a bear run.

A naked call isn't going to reduce the risk of your naked put by all that much -- you're getting twice the premium but now you're opening yourself to a bear AND bull run. What happens if I sell a lot of 60 Jan calls on MSFT and a lot of 50 jan puts on MSFT and MSFT rallies to 75 or word gets out that Bill is a transexual and the stock plummets?

Where is Metooxx? Unusually quiet since this is your bread a butter -- let's hear it from the expert!

do you think there are absolutes... in options trading and strategies? Or is there room for put selling in "your" book and Maverick's book?!

I do it, and then typically decide whether to leg into longs at very cheap prices to hedge shorts

Ice

 

[iceman1]

Quote from ktm:



I think Steve has it right. If you take all he is saying at face value, it is not "easy", nor does anyone who has done this for any amount time successfully spend the entire time naked. All he is saying is that you need to avoid the greed trap, be mature and understand what you are trading. It is that simple, but those things are not that simple to master.

Maturity has its moments here, but judging from some other posts, there is a fundamental lack of understanding about how some instruments are priced and margin requirements. As this misinformation is allowed to continue on these forums, the urban legend Steve refers to continues to grow.

It is very clear that selling naked is very dangerous if you fail to adhere to certain principles, but so is operating a motor vehicle. One slip or moment of inattention can be catastrophic.

All of the guys I know who successfully sell naked, myself included, hedge at some point when things go against them. So many of these posts act like once you're naked, that you just have to sit there til expiry or a margin call. The other assumption is that all of us are playing Russian Roulette, just waiting to blow up - that those naked sellers are just asking for it.

I don't want to advocate anyone else selling naked. We can all make money at this with our own methods. I think the biggest criticisms of naked sellers are from those who don't fully understand the entire process - that is - our systems and rules and how conservative you can really be while selling naked.

Agree....

you can always "hedge" your naked exposure to preserve capital. It may be preserving a larger loss than desired, but it can be done. On the other hand any event like '87 etc. would be devastating.

But ... please then.... tell me how longs in the underlying would not be hurt even worse given a dollar for dollar loss on the down move. I think the more sophisticated options gurus and former MMs tend to out-think themselves off-floor (although I do totally respect ther opinions). We are not necessarily talking about 1000 lots or even 100 lots, here.

Preserving capital should be # UNO... but there are other ways to get burned badly in a catastrophic event besides "NAKED" selling of put options. It just seems like "naked" has more risk... but any overnight equity or futures pos. carries risk in a untoward scenario!

Ice

 

[ktm]

The hedge is not dollar for dollar and it is not put on for very long. In my case, it buys some time and adds some security. If the underlying moves in close and I hedge, I will take off the hedge and roll up shortly after moving solidly ITM. The extra profit from the hedge allows me to go further ITM. If the underlying retreats, I will take off the hedge with a small loss but a nice premium deterioration in the original write.

I only do this within a few weeks of expiration, because getting whipsawed into hedging and unhedging (near the strike) wipes out all of the profit after a few rounds. If the underlying gets close with more than a few weeks left, I either roll up or make other repairs. Sometimes I have written both sides and can cover the cheaper opts to free up more capital (margin) to roll up or out. The "gold" in all of this is the hedging ratio to allow the best preservation of capital while allowing for the most flexibility of underlying movement. Max has repeatedly dropped 15+% (a number of individual months) on his writes. I have never had a month anywhere near that bad.

Most months, the SPX does not get near my strike. As I said in an earlier post, my greed is showing through as I am having to write closer strikes to compensate for the low VIX.

 

[klutz]

iceman

Every one of you guys who advocates selling naked justifies it by pointing out that you can always hedge your exposure. Which means it aint naked no more......................end of problem........ simple!

QED ?

 

[iceman1]

Quote from klutz:

iceman

Every one of you guys who advocates selling naked justifies it by pointing out that you can always hedge your exposure. Which means it aint naked no more......................end of problem........ simple!

QED ?

Is holding equities or futures overnight... without options protection... naked?

I

 

[Ikspec]

Quote from klutz:

iceman

Every one of you guys who advocates selling naked justifies it by pointing out that you can always hedge your exposure. Which means it aint naked no more......................end of problem........ simple!

QED ?

Klutz,

Simple excercise (no pun intended)...

ES at 1000.

You go long 1 future.

OR

You sell 1 naked put, front month.

ES opens at 500 tomorrow. Where have you lost more? And does it matter at that point?

Q.E.D.?