Selling Options Naked

[blange]

I recently read two introductory texts on how to sell options naked (namely out of the money strangles). Both of them oversimplified the process so I'm looking for advanced texts that will delve deeper into managing and hedging short options positions. Any suggestions?

The texts I read were:
1) The Complete Guide to Selling Options (fairly basic, does not delve into option pricing, effect of vol on short options, hedging, etc)
2) Options for Beginners (also very basic, primarily suggests use of Iron Condors)

I've checked the McMillan book as well as The Option Trader Handbook, and neither of them go into enough detail into position evolution and management (they basically just advise against shorting options)

 

[nazzdack]

Quote from blange:
....texts.......and......detail.....

1) McMillan, then Natenburg, then Cottle and then maybe the books that require multiple PhD degrees in math to understand.
2) You may be overthinking it. When people start talking about "managing and hedging" positions, the original position has probably turned into a loser and you, the trader, are having difficulty taking a loss. Don't compound it by attempting to "trade around" it.

 

[Carl K]

Quote from blange:

I recently read two introductory texts on how to sell options naked (namely out of the money strangles). Both of them oversimplified the process so I'm looking for advanced texts that will delve deeper into managing and hedging short options positions. Any suggestions?

The texts I read were:
1) The Complete Guide to Selling Options (fairly basic, does not delve into option pricing, effect of vol on short options, hedging, etc)
2) Options for Beginners (also very basic, primarily suggests use of Iron Condors)

I've checked the McMillan book as well as The Option Trader Handbook, and neither of them go into enough detail into position evolution and management (they basically just advise against shorting options)

I understand that selling naked options, could be profitable 99% of the time.
Markets gap, and then there are "Black Swans", the remaining 1%,
can take your account, your future, your home, etc.

Selling naked requires deep pockets. (High Risk)
Hedge funds can do it, but they are using other peoples money.
And most of them fail, given enough time.

Spread trading, using Iron Condors, Butterfly's, etc. are already hedged trades
(pre-defined max loss). It would be safer to learn to spread trade.

 

[dagnyt]

Quote from blange:

I recently read two introductory texts on how to sell options naked (namely out of the money strangles). Both of them oversimplified the process

Oversimplification is a big problem.

Take a look at The Rookie's Guide to Options. (I'm the author).

Risk management is a big part of the book, and I also recommend against selling naked options. But, you can sell call spreads and put spreads to substantially cut risk (and reward). A good trade-off IMHO.

Here's a glimpse of the book, with a short excerpt from each chapter.
http://www.mdwoptions.com/freebook.pdf

Mark
http://blog.mdwoptions.com/options_for_rookies/

 

[Free Thinker]

Quote from Carl K:

I understand that selling naked options, could be profitable 99% of the time.
Markets gap, and then there are "Black Swans", the remaining 1%,
can take your account, your future, your home, etc.

Selling naked requires deep pockets. (High Risk)
Hedge funds can do it, but they are using other peoples money.
And most of them fail, given enough time.

Spread trading, using Iron Condors, Butterfly's, etc. are already hedged trades
(pre-defined max loss). It would be safer to learn to spread trade.

selling naked options without leverage has exactly the same risk as being long that underlying. as evidenced by the past few months that can be painful.

 

[JJacksET4]

Quote from vhehn:

selling naked options without leverage has exactly the same risk as being long that underlying.

Not for all options - I assume you are referring to put options that are sold short. How about selling call options however:

If a person sells a 50 strike call for $300 and the next morning the stock gaps up to $500 (not likely I admit), they are underwater about $45,000.

If a person buys a 50 strike call for $300 and the next morning the stock gaps to $0 (possible), the are out $300 and their account is safe.

Also, most people will simply not be allowed to sell naked call options through their broker, so it's barely even worth discussing. Most people at least need to consider buying the far out wings for protection.

 

[Free Thinker]

Quote from JJacksET4:

Not for all options - I assume you are referring to put options that are sold short. How about selling call options however:

If a person sells a 50 strike call for $300 and the next morning the stock gaps up to $500 (not likely I admit), they are underwater about $45,000.

If a person buys a 50 strike call for $300 and the next morning the stock gaps to $0 (possible), the are out $300 and their account is safe.

Also, most people will simply not be allowed to sell naked call options through their broker, so it's barely even worth discussing. Most people at least need to consider buying the far out wings for protection.

yes i was thinking puts.

 

[forex-forex]

Quote from vhehn:

selling naked options without leverage has exactly the same risk as being long that underlying. as evidenced by the past few months that can be painful.

Quote from JJacksET4:

Not for all options - I assume you are referring to put options that are sold short. How about selling call options however:

If a person sells a 50 strike call for $300 and the next morning the stock gaps up to $500 (not likely I admit), they are underwater about $45,000.

vhehn is correct, whether you are selling calls or puts - without leverage. Using your example if both traders had $50,000 in their trading account:

Sell one 50 Call @ $3.00 = $300.00 Credit
or
Sell 100 shares @ $50.00 = $5,000.00 Credit

Stock gaps to $500.00. Stock seller must buy back stock for $50,000 - $5,000 credit = $45,000 loss. Option seller must buy back calls for $450.00 * 100 = $45,000 minus the $300 credit. Both traders loose about the same.

 

[JJacksET4]

Quote from forex-forex:

vhehn is correct, whether you are selling calls or puts - without leverage.

Yeah, but read his post again - he said the same whether selling options or going long the underlying stock. Selling Calls is certainly not the same risk as going long the stock.

I agree that it's the same as going short. He didn't make it clear enough in his post that he was referring to selling puts/going long stock or selling calls/going short stock.

This is really quite simple stuff btw.

JJacksET4

 

[rickf]

FWIW saying the only option I would sell naked are cash-secured puts on stock that I either would LOVE to own or "wouldn't mind" owning if I got assigned.

IE, I am short various GE puts now - I would LOVE to own GE under 10 or 8.

IE, last fall I sold MS puts off-and-on during those big vol swings. I made some small profits there but it was a trading play on volatility....while I wouldn't be looking to own MS at those levels, if I got put the MS shares, I wouldn't mind owning.

But would I be selling puts on ultrasmallspecstock just because it had a fat premium? Nope, not even as a trade.

I've been tempted, but never have (or likely would) sell naked calls, even if I was sure they were appropriately "cash secured.' For me the r/R is so not there in that setup.