Selling Naked
- Thread starter nugya
- Start date
I used to sell strangles about 5 years ago, but got out,because I kept getting stopped out. The juicy premiums were always the
volatile stocks. This was basically my strategy:
1. XYZ stock is selling for $100 a share.
2. Sell a 110 call for 3
3. Sell a 90 put for 2.5
4. That gives you 5.5 in premium
5. If stock goes to 115.5, get out.
6. If stock goes to 84.5, get out
As far as expire months, I would sell strangles that had 30
days left. I used a "price stop", but some like to use a dollar stop.
In other words, I would hang on till the price touched 115.5 or
84.5, then close out both sides for a therotical break-even. But,
some will get out as soon as the call or put trades at 5.5 for a
small loss on the other side.
Hope this helps
True, but there are ways to eliminate the risks, thereby making writing options one of the safest and most profitable ways to make a consistent profit in the markets. One just has to think outside the box.
Good luck trading to all,
Bob on Whidbey Island
"Don't confuse effort with results."
I have no problem with naked positions, that is the bulk of what we do. However I don't understand your comment about ways to eliminate the risk.
If you have a delta neutral strategy or any type of a hedge,; you are no longer naked.
And, I have had enough hedges not hold to truly understand the theoretical aspects of what we do ...
Portfolio writing, covered or not, is a proven strategy and is documented and tracked here:
http://www.valueline.com/pdf/vloptbook.pdf
http://www.valueline.com/pdf/vloptbook.pdf
Stock Market Wizard, Mark Cook was using the trading strategy early in his career of selling options and making good money doing it. He was doing so well with his trading that he started trading for some family members. He had a system worked out that he thought he'd "perfected" that was consistently making him money. Then in June of 1982 he decided to step up his trading even more. He ran his program one week that month and it came up with a list of trades for a company called Cities Service. The stock was trading at $27 and the 35, 40, and 45 call options were selling for premiums far above the model-implied prices with only about a week left before expiration. He couldn't believe the prices and felt as though they were giving him the money. He sold hundreds of these options. He says, "I still remember that on June 16, 1982 - one day before the day that will live in infamy for me - I tried to sell an additional hundred options at a specific price right before the close, but I didn't get filled."
"The next day, they announced that Cities Service was going to be bought out for $20 more than the highest strike price option. They shut down trading in the stock and options for the rest of the week and didn't resume trading until after the option expiration. Of course, the options got exercised [leaving Cook about one hundred shares for each option he had sold] and by the time the stock started trading again, he was down $500,000.
Jack Schwager asks, "Did that include your family's accounts?"
Cook: "No, that was just my account. I had gone from $165,000 at the start of June to a deficit of over $350,000. In addition, I had lost over $100,000 apiece in accounts I had for my mother, father, and aunt. I still have the trade slips right here in my desk drawer. It wasn't until last year - seventeen years after this happened - that I was able to pull them out and look at them. I had a margin call in excess of one million dollars on my account, which is what I would have had to put up if I wanted to hold the short stock position instead of buying it back. Technically, you are supposed to have five days to meet the margin call, but the firm was on me to cover the position right away."
Part Two Follows -
From "Stock Market Wizards" by Jack Schwager
http://www.invest-store.com/cgi-bin/elitetrader-bin/redir.cgi?moreinfo.cgi?item=11661
"The next day, they announced that Cities Service was going to be bought out for $20 more than the highest strike price option. They shut down trading in the stock and options for the rest of the week and didn't resume trading until after the option expiration. Of course, the options got exercised [leaving Cook about one hundred shares for each option he had sold] and by the time the stock started trading again, he was down $500,000.
Jack Schwager asks, "Did that include your family's accounts?"
Cook: "No, that was just my account. I had gone from $165,000 at the start of June to a deficit of over $350,000. In addition, I had lost over $100,000 apiece in accounts I had for my mother, father, and aunt. I still have the trade slips right here in my desk drawer. It wasn't until last year - seventeen years after this happened - that I was able to pull them out and look at them. I had a margin call in excess of one million dollars on my account, which is what I would have had to put up if I wanted to hold the short stock position instead of buying it back. Technically, you are supposed to have five days to meet the margin call, but the firm was on me to cover the position right away."
Part Two Follows -
From "Stock Market Wizards" by Jack Schwager
http://www.invest-store.com/cgi-bin/elitetrader-bin/redir.cgi?moreinfo.cgi?item=11661
Continuing:
That night he called his mother, which was the hardest phone call he ever had to make. He felt like a complete failure. He felt like he should be put in shackles and hauled away. "Mom," I said, "I need to talk to you."
"What is it?" she asked
"I think you need to come over to the house tomorrow morning to discuss it."
The next morning around 6:30 A.M., he looked out the window and saw his mom dragging up the walk at a snails pace, which was very unlike her.
She came in and asked, "Mark, what is the problem?"
"Sit down on the couch, Mom," he said solemnly.
She sat down and asked, "What's wrong Mark? Is it something serious?"
"Yes, I'm afraid it is," he answered "Mom, I lost $100,000 of your money."
She didn't flinch at all. She looked him straight in the eye and asked sympathetically, "How much did you lose, Mark?"
"I lost half a million dollars."
"But you don't have half a million dollars."
"I know, Mom."
"What else?"
"What do you mean, 'What else?'" he asked
"Besides losing all this money what else is wrong?"
"That's it Mom." he answered
"Oh, is that all! I thought you had cancer."
"Did that ever put things in a different light. Her next sentence was unbelievable." "How long will it be until you make it back?" she asked
"If she would have said anything else, I would have quit. But she had said just the right thing, at the right time. I straightened myself up a bit and said, "Five years," picking a number out of the air because I had no clue how I would make the money back."
"If you make the money back in ten years, that's okay,' she said. "Now go ahead and do it."
"From that point forward, I never again sold any naked options."
As it turned out, ironically, the deal for Cities Service fell through and if he had been able to meet the margin call, within a month, he would have made back all his money and even had a profit. Of course if he had been filled on the last hundred options he was trying to sell that last day, he would have been forced into bankruptcy.
And he did end up making the money back.
To read the rest of this story check out Jack's book, "Stock Market Wizards". A very enjoyable book. I really enjoy reading about the experiences of other traders.
http://www.invest-store.com/cgi-bin/elitetrader-bin/redir.cgi?moreinfo.cgi?item=11661
That night he called his mother, which was the hardest phone call he ever had to make. He felt like a complete failure. He felt like he should be put in shackles and hauled away. "Mom," I said, "I need to talk to you."
"What is it?" she asked
"I think you need to come over to the house tomorrow morning to discuss it."
The next morning around 6:30 A.M., he looked out the window and saw his mom dragging up the walk at a snails pace, which was very unlike her.
She came in and asked, "Mark, what is the problem?"
"Sit down on the couch, Mom," he said solemnly.
She sat down and asked, "What's wrong Mark? Is it something serious?"
"Yes, I'm afraid it is," he answered "Mom, I lost $100,000 of your money."
She didn't flinch at all. She looked him straight in the eye and asked sympathetically, "How much did you lose, Mark?"
"I lost half a million dollars."
"But you don't have half a million dollars."
"I know, Mom."
"What else?"
"What do you mean, 'What else?'" he asked
"Besides losing all this money what else is wrong?"
"That's it Mom." he answered
"Oh, is that all! I thought you had cancer."
"Did that ever put things in a different light. Her next sentence was unbelievable." "How long will it be until you make it back?" she asked
"If she would have said anything else, I would have quit. But she had said just the right thing, at the right time. I straightened myself up a bit and said, "Five years," picking a number out of the air because I had no clue how I would make the money back."
"If you make the money back in ten years, that's okay,' she said. "Now go ahead and do it."
"From that point forward, I never again sold any naked options."
As it turned out, ironically, the deal for Cities Service fell through and if he had been able to meet the margin call, within a month, he would have made back all his money and even had a profit. Of course if he had been filled on the last hundred options he was trying to sell that last day, he would have been forced into bankruptcy.
And he did end up making the money back.
To read the rest of this story check out Jack's book, "Stock Market Wizards". A very enjoyable book. I really enjoy reading about the experiences of other traders.
http://www.invest-store.com/cgi-bin/elitetrader-bin/redir.cgi?moreinfo.cgi?item=11661