What is the optimal portfolio allocation (%) to naked options?

[tonyf]

Take the example of a balanced portfolio, containing equities, funds, bonds and treasuries.

1) An investor is using naked puts (portfolio margin) and may want to own the underlying if exercised but will have to sell his other assets to do so.
2) OTM naked puts written against very solid balance sheets. Underlying shares benefit from a very low volatility.
3) Investor is fearing another correction at some points (Underlying prices dropping and/or IB increasing margins over night) and wonder how much he should allocate to options.
4) Investor likes those naked puts a lot in the current market, and cares to increase this part of the portfolio as much as possible without enduring excessive risks.

If you were the investor, how much would you allocate to naked puts?

 

[lindq]

If you were the investor, how much would you allocate to naked puts?

Nada. Zilch. Zero.

 

[R1234]

I going to start doing a cash-secured put strategy in my account in the near future once I feel comfortable with backtesting results. Initially I plan to allocate about 2.5% of my overall portfolio to it. And if it goes well maybe increase to 5%. I am calculating it as fully assigned value divided by overall account value ie. the amount of money I would have to pay out if I got assigned on every single put that I am short.

 

[tonyf]

I going to start doing a cash-secured put strategy in my account in the near future once I feel comfortable with backtesting results. Initially I plan to allocate about 2.5% of my overall portfolio to it. And if it goes well maybe increase to 5%. I am calculating it as fully assigned value divided by overall account value ie. the amount of money I would have to pay out if I got assigned on every single put that I am short.

What is the advaantage of selling CSPs vs naked puts on margin? One can always sell other securities to have cash if need be.

 

[ffs1001]

Initially I plan to allocate about 2.5% of my overall portfolio to it.

In that case, a $1million portfolio means you can allocated $25K to the cash-secured puts, which allows you to sell 1 ATM put on something like FB(current stock price of 251) for around 6.50 (expiring 25-Sep), thereby collecting $650.

What would the other $975K of the portfolio be used for?

You may want to have a read of this wonderful thread on cash-secured puts :
https://www.elitetrader.com/et/thre...y-never-discussed.327608/page-21#post-5204254

 

[xandman]

Both will be part of your equity allocation. You can treat 1 option as an equivalent 100 shares of the underlying as notional value. Or, you could be more aggressive and use delta dollars but be ready to adjust more frequently.

The increased variability of your returns is due to the leverage and the capital freed up would end up to partly bolster your fixed income or cash allocations.

Given the low returns of the other asset classes, it really isn't worth using the leverage just because it is available. You need an option strategy that can add alpha.

 

[R1234]

What is the advaantage of selling CSPs vs naked puts on margin? One can always sell other securities to have cash if need be.

in CSP you are not using any margin or leverage. It's a conservative strategy, or so they say.

 

[R1234]

In that case, a $1million portfolio means you can allocated $25K to the cash-secured puts, which allows you to sell 1 ATM put on something like FB(current stock price of 251) for around 6.50 (expiring 25-Sep), thereby collecting $650.

What would the other $975K of the portfolio be used for?

You may want to have a read of this wonderful thread on cash-secured puts :
https://www.elitetrader.com/et/thre...y-never-discussed.327608/page-21#post-5204254

in the other 95% I am trading different non-option strategies.
I will have a look at that thread thx.

 

[tonyf]

Both will be part of your equity allocation. You can treat 1 option as an equivalent 100 shares of the underlying as notional value. Or, you could be more aggressive and use delta dollars but be ready to adjust more frequently.

How do you assess delta dollar?

The increased variability of your returns is due to the leverage and the capital freed up would end up to partly bolster your fixed income or cash allocations.

Given the low returns of the other asset classes, it really isn't worth using the leverage just because it is available. You need an option strategy that can add alpha.

 

[R123]

ZERO, ZERO, ZERO

Your problem is in your point 1, "you may have to sell other assets" . By holding them now you do not want to sell them. Why sell them by force latter ???

Chances are:

The whole market crashes, you get your new assigned goods by selling discounted holdings you may not want to sell at the level they are now at.

Or the market is rallying and your put tanks because of some fumble by the underlying company, and you get to sell "good" holdings out of the rally to put good money in a stock you know "may not want to own".

These ideas look good on paper but never seem to work out when it hits the fan.