Selling Options Naked
- Thread starter blange
- Start date
Thanks for your insightful comments, guys. Have any of you been able to generate consistent profits by writing naked out of the money strangles and controlling your risk (i.e. intelligent selection, cutting and rolling after a certain loss limit).
If so,
1) How did you decide whether to turn your system on or off (i.e. decided that the market conditions weren't suitable for this strategy)
2) What was your risk management or repair strategy? (i.e. buying back at at predetermined stoploss, rolling out and up)
3) Did you start out delta neutral and adjust or did you try to leg into trades? (sell calls near/at top of range, sell puts near/at bottom)
I realize the current market conditions are highly suboptimal for this strategy, but it probably would have worked really well from 2003 - 2008 or during any other low volatility period. Seems like a good strategy to have in your arsenal once all the volatility dies down.
If so,
1) How did you decide whether to turn your system on or off (i.e. decided that the market conditions weren't suitable for this strategy)
2) What was your risk management or repair strategy? (i.e. buying back at at predetermined stoploss, rolling out and up)
3) Did you start out delta neutral and adjust or did you try to leg into trades? (sell calls near/at top of range, sell puts near/at bottom)
I realize the current market conditions are highly suboptimal for this strategy, but it probably would have worked really well from 2003 - 2008 or during any other low volatility period. Seems like a good strategy to have in your arsenal once all the volatility dies down.
Dear all,
First of all, I would like to congratulate with participants for the high level of some of the posts in this forum.
While reading this thread I was thinking to share my way on the topic.
1) I sell OTM options only on index that are less volatile then stocks
2) I use maximum 20% of the account for margin (for margin I generally use bonds as collateral).
3) I preferably sell put when the IV is high (i.e after important fast down moves or in a bull market after important retracements)
4) I exit the trade if and when the gain is around 80-90% of the collected premium. Rarely I bring position to expiration.
5) Sometimes I exit the trade after 2-3 days if the gain is more then 50% of the premium (i.e IV sharply decrease).
6) I generally exit the position when premium double (the loss is equal to the premium).
7) Sometimes I exit a trade with smaller loss even before the premium double if I'm not comfortable with the boundary conditions.
One more think: selling naked OTM options on index or futures is less risky then buying the underline (at least at the beginning of the trade) because of the delta.
If I sell a put with a 10 delta, I'm currently risking 10% of the corresponding future contract position.
This means that I have more time to act and to exit the trade with a small loss while the delta increases if the market is moving against my position.
Another consideration: not all the market conditions are good to sell naked options. I understand the risk of the improbable "black swan" and this is the only reason why I'm thinking to put in the account also spreads.
Regards
Alex
First of all, I would like to congratulate with participants for the high level of some of the posts in this forum.
While reading this thread I was thinking to share my way on the topic.
1) I sell OTM options only on index that are less volatile then stocks
2) I use maximum 20% of the account for margin (for margin I generally use bonds as collateral).
3) I preferably sell put when the IV is high (i.e after important fast down moves or in a bull market after important retracements)
4) I exit the trade if and when the gain is around 80-90% of the collected premium. Rarely I bring position to expiration.
5) Sometimes I exit the trade after 2-3 days if the gain is more then 50% of the premium (i.e IV sharply decrease).
6) I generally exit the position when premium double (the loss is equal to the premium).
7) Sometimes I exit a trade with smaller loss even before the premium double if I'm not comfortable with the boundary conditions.
One more think: selling naked OTM options on index or futures is less risky then buying the underline (at least at the beginning of the trade) because of the delta.
If I sell a put with a 10 delta, I'm currently risking 10% of the corresponding future contract position.
This means that I have more time to act and to exit the trade with a small loss while the delta increases if the market is moving against my position.
Another consideration: not all the market conditions are good to sell naked options. I understand the risk of the improbable "black swan" and this is the only reason why I'm thinking to put in the account also spreads.
Regards
Alex
Alex, i like your approach. It's reasoned and practical. Even in the case of the Black Swan you will survive and recover because you are not over leveraged. It is always too much leverage that makes the Black Swan event irreversible for some. Past Black Swans have been followed by quick recoveries, and the only ones killed were those who used too much leverage.
Beg to politely differ with the black-or-white assessment here.
Do you consider selling cash-secured puts as a form of 'naked' position? I don't. Now, if I didn't have the cash backing up that position, yes, I'd view that as 'naked' -- but perhaps we're just splitting hairs here. Each according to their own strategy/style, I guess.
I would like to say again that being short a naked option on margin (without the cash) is initially less risky then being long or short the underline future contract.
So if nobody should go short naked options, no one would be ever willing to trade any futures.
But the futures industry is pushed by banks and brokers that allow small traders enter in too big positions with very small account, while options short selling is sometimes not allow at all. isn't this strange?
I agree. I had success selling naked options some time ago but lost interest in them.
My style was to sell naked calls, puts on huge expansion days and buy back the option after a couple of days when the IV went down.
The problem I ran into was that since I was always offering out at a theoretical price which was only getting hit one out of ten times. So I got frustrated putting out all of these sell orders but never getting hit and then getting charged the cancellation fees. The fees are small but it still pissed me off.
There is huge money in options and pretty low stress too. I need to get back into them.
John