...didn't mean to imply otherwise - they have a pretty good sharpe, seem sensible in how they've managed risk in the past, and seem to be recognized for it.
What to make of this strategy?
- Thread starter HowardCohodas
- Start date
...didn't mean to imply otherwise - they have a pretty good sharpe, seem sensible in how they've managed risk in the past, and seem to be recognized for it.
Quote from Soon2Bgreat:
...didn't mean to imply otherwise - they have a pretty good sharpe, seem sensible in how they've managed risk in the past, and seem to be recognized for it.
Yeah. I agree. They seem to manage risk well. While other premium sellers got hurt in March of this year, this guy made 5%. He seems to only lose money when there is a major calamity or in months where this is a 1 day shocked which was unexplained at the time (Jan 2008).
That is exactly my concern. I saw someone say they traded this method and I was trying to understand the risks.
Atticus says he does this with OPM with individual stocks on this thread:
http://www.elitetrader.com/vb/showthread.php?s=&threadid=206482
But he buys downside index protection.
Also, did you read the file Dr Joe posted in his new Yahoo group? It's an old paper on selling puts, then doubling down if you get assigned by selling CCs and more puts. I think they do it up to 4x.
http://www.elitetrader.com/vb/showthread.php?s=&threadid=206482
But he buys downside index protection.
Also, did you read the file Dr Joe posted in his new Yahoo group? It's an old paper on selling puts, then doubling down if you get assigned by selling CCs and more puts. I think they do it up to 4x.
First of all it is not a once in 80 year occurrence, not even close.
Second, the one that does you in is the one that hasnât happened before and cannot be predicted. I can think of a whole host of occurrences that if they happened to transpire would result in a 20% gap down and a triple digit VIX. The gap is what will hurt these type of traders, not a big move that happens over the course of a few days. If that were to happen margin requirements could be raised significantly and naked option writers would be done. These guys would lose everything and be shut down, that is simply a fact that is indisputable. The only question is if/when the big scary gap down happens.
I don't think there has been another year where the overall market had a 30% drawdown, but I could be wrong.
Anyway, you are right about the unknown events. Everyone is subject to that and in that situation no one really knows what their risk is. And the raising of margin requirements won't be their only concern. Regulations can change fast (like the short sale ban in 2008), or market dynamics can change like settlement and depositing/withdrawing cash. These guys will almost certainly blow up. Who knows what other strategies will as well. Convertible strategies (which are long vol) blew up because they couldn't hedge their delta in 2008. What wacky times, moments of stress and fear can create.
The risk is that if the stock drops, you will get peanuts for the OTM strike that breaks you even. If you write a lower strike, you lock in a loss if assigned. The more the stock drops, the less likely that you'll ever get back to breakeven unless you become a B&H type or you increase the size of the position at lower prices (or do something like a covered call write) and you get a bounce.
AFAIK, writng NP's/CC's is fine for a buy & hold type who wants to generate some income for his portfolio and/or acquire stocks at a lower cost basis. He's going to prety much hold the protfolio through thick and thin. For the trader? Not such a good idea.