Quote from jones247:
Thanks for the advice Riskfreetrading... unfortuneately, most of the points you made were a bit too esoteric for me. Perhaps someone can "shed some light" on the various points on that post. I believe without an edge, then this is all a game of "blind gambling".
Although selling naked options seem risky, and it indeed is risky without proper money management, individuals such as Max Ansbacher and James Cordier & Michael Gross have been consistently VERY profitable selling naked options in the futures market.
Perhaps this strategy I proposed in this thread would be best suited for the soft commodities (i.e. coffee, cocoa, wheat, soybean) and financial commodities (i.e. 10-yr treasury note & federal funds rate).
I have the utmost respect for Dr. Nassim Taleb; although I'm still developing my understanding of VAR and skew on the IV and risk. I understand the potential harm of selling deep otm options, and I understand why you would hoard them. Nonetheless, I believe that there are ways to mitigate an adverse impact if the market turns against your short positions. Others have implied that better hedging/mitigating strategies exist beyond the ones I suggested. It would be great if someone was willing to share and discuss such strategies. Hopefully we're here to help each other in a common purpose to mutually enhance our trading experience.
Walt
Walt,
I did not mean in my post to be negative. I rather want to say that you seem to have the right temperament and attitude to be successful in options trading. Continue to question everything (even if what you question is right) as this will strengthen your understanding and skills. An edge does not need to be necessarily a mathematically/experimentally proven edge. It could also be that you are or will be better than the next fellow playing a similar game. If view options trading as "gambling", there are differences. In this case you design the system and you set your own rules as opposed to gambling in a casino where you are subject to their rules. Even if you were to go it with the probability/gambling edge (in terms of designing your system) it is still not really gambling as you are offering a service to the finance services. Remember, options that you write may be used by others to hedge which is useful to society. There is some value here, but your business will need to be managed as a business even if sometimes you may have to ran it as a "gambling" house. Probably you should rather view it as an insurance business (if you are a net writer of premium).
In my reference to long premium, I did not mean that you should be overall long premium. In fact I think you should not, because we know that the general public is general long premium and the professionals are predominantly short premium. What I was trying to say is that you should buy those 1cent to 2cent options to protect yourself. Take their cost from your profits, and you will feel/sleep well.
There is also the other protection that the long options offer. Imagine your broker decides to change his margin. It is the broker's right to do so. If your margin is not there, they will liquidate your position at the worse price and possibly even with a huge bid/ask price. Your position can profitable if held to expiration. But if the brokers close it, you would lose your position, potential profits, and would close it at a bad/negative results.
The point is that you should make sure you are the commander of your ship/destiny, and that you make the calls and no one else. Control is priceless!
Lastly, I do not think you should abandon your idea. Push it further. If it does not work, another idea will pop out. Your idea created debate. That is good, and a sign that greater ideas will be coming. What I and others say, while are written to help and are genuine, they remain opinions/views etc. So do not hesitate to pound on them and questioned them (even if they are right).
Bottom line will be that you will make money. If I have to bet, I think you are or will make money.
