Selling Naked

Price, yes. Margin no.

The closer the stock gets to $5000, the LOWER your margin requirement and the lower your chances of early exercise. The margin requirements reflect that change.

Sure the IV affects the price of the option, but when your stock goes from $100 to even $150, the premium decay will far outstrip the rise in IV. Show me a broker that will INCREASE your margin on a sold put as the underlying moves from $100 to $150. I say it's impossible to have any SIGNIFICANT move AWAY from your strike (in the seller's favor) and have the margin requirements increase. I have been selling options since the mid 80s, and I have never seen it happen.

IV plays into the formula, but not near as much as the underlying price.
 
Quote from klutz:

You're the one who'se missing the point steve. Writing options. naked or covered, is a game for experienced players and the problem with new traders is that the "easy" money that's offered is difficult to resist when someone like you sets out such a "clear and reasonable" formula for success.

And then we have the broker, the one with a "decent reputation" who is concerned for your welfare...............bullshit , all he's concerned about is covering his arse in the event that once you've lost your money you'll go crying to the regulators.

Vhehn correctly points out that if you sell 10 put options at $10 then your max downside is $10,000 but even if the new trader with $10,000 does limit himself to a trade like this, how long will it be before he's doing 2 then 5 then 10. After all the guy's a trader now and he has to gear up ............I mean everybody else is doing it!

We all think we're so smart but the biggest problem of all is when we do something WRONG and we get rewarded. Thats why the analogy with Russian roulette is so relevant. I'll bet that if you measured the contestants heartbeats when they did it you would find that with each successive pull of the trigger their heartbeat would slow a bit as they became "more comfortable" with the risk. Selling naked options is no different, its madness for which you are rewarded and the longer you do it the more sensible the stupidity will seem.

Whatever I or anybody else say its not going to stop people writing naked options or smoking tobacco or doing other idiotic things because most of us think that the statistics only apply to other people.
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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.
 
I myself have sold baskets of Naked call options for seveal of years, mainly deep out of the money calls, 2 weeks til expiry, with time decay in my favour, and yes, it was succesful. BUT the longer I thought about it the worse it felt - say a med research firm who suddenly discovers a cure for cancer, or a petrochem discovering a new source for fuel or a mega merger- how are u gonna hedge that when the news is out, your not, your gonna get wiped out, and some. Thats why brokers like to have a copy of your passport before you start writing them!, your risk is unlimited, and i dont want 15 years of trading to dissapear in a matter of minutes, along with my house. :eek:

But don't let me stop anyone else

my 2CW
 
I only sell naked on the SPX. In 87 and on 9/11, the opens were not more than 20 - 25 points off the close. I can get E-Minis overnight to hedge if necessary, so no need to wait for the open. I agree with you that writing naked individual equities is very risky.

I would only write naked equity options in very limited circumstances. Risk vs. reward are out of line in most cases.
 
Quote from Kap:

I myself have sold baskets of Naked call options for seveal of years, mainly deep out of the money calls, 2 weeks til expiry, with time decay in my favour, and yes, it was succesful. BUT the longer I thought about it the worse it felt - say a med research firm who suddenly discovers a cure for cancer, or a petrochem discovering a new source for fuel or a mega merger- how are u gonna hedge that when the news is out, your not, your gonna get wiped out, and some. Thats why brokers like to have a copy of your passport before you start writing them!, your risk is unlimited, and i dont want 15 years of trading to dissapear in a matter of minutes, along with my house. :eek:

But don't let me stop anyone else

my 2CW
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That's what I've been studying -- and I've come to the conclusion that selling puts / calls on individual issues is dangerous. The purpose of the normal distribution curve is to map out the probabilities of what a stock might do X days from now.

If you believe that stock movements are close to the normal curve, then you might be able to make 5-10% by selling a well out OTM option. You'll get away with this 90-95% of the time. The problem occurs when you make a trade that is the other 5-10% of the time, where you financially take it six ways from Sunday.

However, you could always purchase another option two or more strikes further out and definately cap your total loss -- but then you're just playing probabilty games.

The only long-term viable way I could see making consistent safe money from options is by arbritrage and hedging yourself against all conceivable possibilities.

You could make money with options without doing so and just keep spinning the wheel and hope that it doesn't fall in the wrong spot.

Perhaps credit spreads would be safer -- or if you have to go naked, do it in some index.
 
I know a guy who sold deep out the money long dated index options, calls and puts. Over the year the mkt moved up strongly and he bought back the puts while buying futures to hedge the calls.

He was'nt comfortable with his position and everyday tried to reduce his exposure but unfortunately volatility had increased and it was'nt easy to reduce his size.

You probably guessed the rest........mkt collapsed a few hundred points, vols went through the roof, the futures that were showing a huge profit were suddenly in the red and the call options were suddenly the same price that they were when the mkt was a few hundred points higher.

Next step was the margin call and the liquidation of the position,
the personal bankruptcy took a little longer. I hope it never happens to you and to steve but it happened to the guys at LTCM and to plenty of very smart and mature and experienced traders.

Good luck !
 
Klutz, good to see your still awake after your early start!

Also a chap Called Nick leeson who was selling OTM puts, and using the premium to prop up and buy futures in the Nikkei, then there was an earthquake!

ouch! - bye bye Barings Bank
 
Smart people can do dumb things. Just because something works for a few years does not mean it will continue to work, markets change, the people trading them change to an extent. Online access has completely changed the way the markets behave.

I don't pretend to be any smarter than anyone else, however I would not personally deal in long dated index options as a seller. The decay is far too slow vs. the potential movement of an index. My maximum timeframe is 6 weeks, sometimes 7 if conditions are appropriate.

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.

You have to take some risk for a nice reward, no doubt about it. This market will take your ass to the poorhouse in a New York Minute if you let the bastard win.
 
ktm, could you discuss your hedging ideas? I tried hedging by buying or selling the stock when it got itm but found it then bounced or retreated back otm. I now trade credit spreads and buy back the short side and let the otm long option run if it looks like a powerful move.
 
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