ways to control short risk

Baozi

Baozi

Hi all,

just would like to know what's your approach when managing a naked short.

Everyone feels like a genius when making money selling naked puts for the first time, but then eventually comes that black swan event that makes you rethink your strategy

With some measure of risk control, however, selling naked premium can be quite profitable. But 80% of the results in my opinion come from knowing when it's the moment to pull the plug on a losing trade.

Just to throw some meat in the discussion, these are the approaches I heard so far:
(Let's keep delta hedging out of the discussion as its entirely another rabbit hole)

1-Based on technical analysis of the underlying
2-after losing a fixed percentage of the premium received
3-after the trade has been going against for x days
4-based on a certain delta threshold
5-as soon as spot goes out of the profit zone

I personally use a combination of 3 & 5.. what about you?
 
Yes, neg. gamma is a bitch. do you use a specific threshold?
On that topic, someone infinitely more knowledgeable than me said that he preferred to watch theta as a proxy for gamma, as it was expressed as a dollar value rather than an abstract number.
 
The majority of my trades are shorts and
I have but one strategy IF the market
turns against me.

It's called a Double/Triple stop and reverse.
Very easy to implement, but it takes emotion
of steel to ride the beast. After you ride it
a few times it's gets easier to handle the fear.

I have another strategy called an inside trade
once the stop level is hit, and the market
starts to go back to it's original direction.

Effective for turning a potential loss into
breakeven or profit. Profit potential is a
thing to behold, ONLY and IF you learn
how to ride it.
 
Although I am a newbie to the options world, I do have decent success as a swing trader. From what I see most options traders, especially naked put holders ignore fundamentals and technical analysis. In my humble opinion, focusing on 20-40 tickers and sectors that have a higher chance of succeeding in the current environment will minimize the risk. Currently, cheap Canadian oil stocks are what I focus on. I wait for a slight pullback and enter at 50 EMA cross on daily charts. Naked puts with 30-45 days expire dates can help. I know this is not a direct answer to your question but I thought I share my 2 cents.
 
what's your approach when managing a naked short.
More...

One simple answer, DON'T OVER LEVERAGE.

But nothing I say is going to change that, someone who has fallen for the 'wheel-strategy' fallacy of some sort of self-perpetual money-making machine as promoted on youtube & tictok gurus, has their mind set and is doomed to fail regardless.

When you try to live by shorting premium, you will eventually die by shorting premium. Take a look at how the so-called super stars of premium shorters always end up...

  • Karen the Super Trader
  • James Cordier the Options King
  • Vic Niederhoffer the 'risk taker'

BOOM!

That said, special bonus goes to Bill Hwang who managed to somehow find a genius way in order to go BUST by purchasing premium instead of selling. But again, that takes a special kind of stock-manipulative 'talent'.
 
I'm a professional and writing options is my most important income. You have to hedge (keep gamma under control) to offset the risk. Also don't write options when IV is too low. And roll on time! Risk control is everything!
 
Baozi said:
I personally use a combination of 3 & 5.. what about you?
More...

Mostly agree with dorietrading hints, plus algorithmic long scalping, to greatly relieve margins and add extra profit (this adds 50% to 100%, and keeps you safer: see my current journal for a practical illustration).
 
dorietrading said:
I'm a professional and writing options is my most important income. You have to hedge (keep gamma under control) to offset the risk. Also don't write options when IV is too low. And roll on time! Risk control is everything!
More...
Genuinely curious, what do you roll on time, is it the hedge?
Do you buy and roll shorter tenor with higher delta?
 
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