Selling Premium - Strategy Never Discussed

Do anyone sell otm call for premium, uncovered.

Potential losses on naked short calls are unlimited, so as you no doubt know, swimming entirely naked is in principle a dangerous game.

This is particularly especially true in some markets such as in individual stocks, where there exists the very real (black-swan fat tail) risk of a buy-out or some other bullish event causing substantial or ruinous losses.

Moreover call side premium tends to present slim pickings by and large, so you have to be really selective for the absolute best opportunities and not be tempted into taking on risk without collecting sufficient reward when evaluating call side opportunities. Getting in on less than desirable call side trades is a tempting mistake to make, premium and risk being usually but not always skewed to and richer on the downside (put side).

What this means in practice is that as for me, I almost always much prefer to put a "synthetic naked" trades on rather than an actual naked trade, and for the above reasons this is doubly true of short calls. This is to say, instead of putting an actual naked short option trade on, you put on a wide spread instead (e.g. "synthetic naked"), thus defining/capping/winging-off the risk, yet the spread retaining most of the behaviour and dynamics of the naked option due to being sufficiently wide, collecting almost as much premium as you would have done had the trade been entirely naked.

Additionally, there are of course markets other than single stock underlyings which are intrinsically more neutral and mean-reverting or in any case not subject to such stock extreme-dislocation related risks (e.g. such as buyouts), which might be better suited to near-naked call-side premium trades, such as some currency and currency futures options (but again, beware), or perhaps, broad market ETFs.

Remember that with every trade you put on, real risk is risk taken on. There is no reward without risk, there is no free lunch. You'd better have a good idea what your exposure/worst case is, both in terms of individual positions and overall.

The market is just waiting to find out how it can punch you in the face and make you hurt when you least expect it. Being engaged in the market actively and constantly increases the likelihood over time to a near dead certainty that you'll be exposed to some unexpected and unpleasant market event or events at some point. So, at some point you will get punched in the face, and when (not if, when) that happens you must be able to survive; grimace, wince, brush yourself off and then move on and/or bear the adversity for a while. You cannot do that if you've been KO'd or killed.
 
Another update while I'm here in case anyone's interested:
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Being engaged in the market actively and constantly increases the likelihood over time to a near dead certainty that you'll be exposed to some unexpected and unpleasant market event.

Or just make sure you're the one that goes home giggling like a moron on psilocyban blowing on a kazoo. Which makes a funny noise that sounds exactly like Wheeeeezzooooo.:):):):)

Very much liked your post though.
 
I've recently subscribed to elitetrader and I've just read this thread. I am very much a newbie Options Trader. After ~ 18mths I categorise myself as consciously incompetent.

We are fairly restricted in Australia. We can trade options with a local broker on the local market and pay ~ USD17 per leg. The liquidity is low on the ASX and the underlying prices are also low - our largest bank trades for around USD54. I've chosen IB and to trade Options on the US market. In our winter the NYSE closes at 6am our time. (Our summer is better when the NYSE closes at 8am our time).

The main theme of this Thread is called the Wheel Strategy on r/options. I've been trading the Wheel for just over six months. I like this strategy:
  • It's easy to understand and to manage.
  • It can be classified as a system (someone referred to Deming in a previous post).
  • Apart from unforeseen catastrophes in the market, the risk is easy to determine and manage. If a company like MSFT went belly-up the world economy would be wrecked so I don't worry about a stock going to zero.
  • The Wheel strategy is well documented.
  • So far I'm doing OK.
I don't trade on margin. I trade CSPs and CCs - mostly. Sometimes I get carried away watching TastyTrade and I will try a complex trade but I find them more difficult to manage.

I'm now working on becoming Consciously Competent so I'm building a Trading Journal using Filemaker Pro (I'm a Mac user) and the IB API. At the moment I'm concerned about being over-exposed so I need to bring that under control.

An aspect that is not often mentioned is becoming competent in 'your' trading platform. For example, there are still many aspects of the IB platform that I don't use/know about/understand.

Finally, are there any other 'systematic' approaches to option trading that are worth looking into?

Hi Hillcrest. ASX options and brokers servicing them used to be so poor for Australian retailers I thought I must have been the only one trading them. The ASX moved to improve the contract terms, liquidity and market making about 5 -7 years ago and now actively promotes them. In response a new broker opened up late 2017 specialising in ASX options refer https://impliedvolatility.com.au/#/

Their platform and pricing appears excellent although Ive only recently signed up and started using it. Trading your home market now that its viable should be a better proposition than offshore as you'll have more inituitive understanding of local companies. Something you might want to look into.
 
Or just make sure you're the one that goes home giggling like a moron on psilocyban blowing on a kazoo. Which makes a funny noise that sounds exactly like Wheeeeezzooooo.:):):):)

Very much liked your post though.

Thanks, appreciate and enjoyed your response, your post made me giggle, ... chortle even. ;)

Wishing y'all a very happy, peaceful and hopefully very profitable 2020.

(That said let me add that while I don't think anyone knows what the market is going to do tomorrow or next week or the next, least of all me, do pay attention to the weather and the season and prepare accordingly as you see fit, just in case!)
 
How have people using this strategy fared in the last few days? I assume you'd have to roll your puts pretty far out to roll for a credit.
 
I'm glad for the opportunity trade at cheaper prices. Monday morning, with the market down about a 1000 points, I sold CSIQ 21 puts expiring this Friday for 70 cents. That's about 3.5 percent of the stock price. Amazing.

Could have bought it back this morning for 20 cents. I'm still in though.
 
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