Quote from lindq:
Show us one, presenting a clear picture of risk and reward.
SumJurks last post had it right on the money. In order to "potentially" net any premium worth the effort, you must either size up or deal with higher dollar instruments, thereby putting yourself at great risk when the eventual hit comes. But unless you actually trade short puts, you won't appreciate that fact until it happens to you.
Even a very successful swing trader doing pullbacks - which are the most efficient setups for short puts - does maybe 75%-80% short term win/loss, if he is lucky. That means 20%-25% of your short puts are going to result in losses, and it only takes a couple of those to completely erase a year's worth of small premie gains. If you are anything less than a great trader, then you are going to get cleaned very quickly. And if you ARE a great trader, you shouldn't be selling puts at all, you should be trading the underlying, because there is absolutely NO reason for you to be screwing around with a strategy that offers very limited reward for taking on the FULL risk of the underlying.
So again, show us a naked put strategy that is "low risk with decent premium".
Let's see it.
I have traded strangles, nakeds, credit spreads, backspreads on indexes and equities for many many years... typically I work hard to control risk and often leg into other strategies after favorable price movement on naked positions, i.e. turn a strangle into a double credit spread on swings. But as some have noted here... many times you question whether you should have traded the underlying. Further if you're not vigilant and ready to pull the trigger to protect capital with appropriate repairs and hedging, you can get busted up and give back a month's worth of time, patience and effort.
An example occurred on July 17th when QLGC posted earnings. I had sold a lot of 47.50 puts and 55 calls short. My actions nearing expiry were indicative of poor risk and money management, complacency and second guessing. The premium on said puts had dropped to 25c with QLGC near 53+ having just made a new high. Well, I did not close thinking it was "impossible" for the stock to drop in a couple days that much, after making a new high. This was a bad habit of mine to hold until expiry rather than pay .15-20-30 to close not wanting to "enrich" some exchange trader on a perceived "worthless" option.
Weeelll... by expiry the low was 46.34, a drop of almost $8 after a gap down post-earnings; and had you taken delivery the low wasn't reached until 8/6/04 @41.61.
The ironic (i.e. frustrating!!!!) part was that I had legged into short stock a couple days earlier but "elected" to get out of the short pre-earnings figuring the run-up was a "tell" on favorable earnings (knowing full-well that they take it higher pre-earnings only to sell into any earnings news thereafter); but the market had been strengthening and gaining momentum... so I decided to not stay short. :eek: :eek:
I have taken a LOT of premium dollars out of the markets selling strangles.... but lindq is correct that one or two can spoil your whole month... not week, and has for me.
There is no doubt that someone who can have a high win rate selling premium should be trading more of the underlying and maybe supplementing this with certain strangle/straddle strategy with an intention to convert into spreads/calendars.
I will add that I do not overtrade the accounts so in the worst case scenario delivery is an OK option; often a very viable one.
But sometimes you find yourself asking "why didn't I just buy QCOM (or calls) at 46-47 rather than sell puts on every strike all the way to last months 65s"??!!
regards,
Ice
