When Danger Lurks In Front of Cash Secured Puts

ironchef said:
So Buffett made money selling puts when they expire worthless. The buyers of his puts lose all their money so how can they be equally profitable buying puts?
More...

But it is not equally profitable the stat proves it, who said they are?

It is more likely that a Black Swan type event will not occur than it will occur. Therefore those occurrences are rare, hence the insurance and also the probability that sellers of insurance profit more than buyers.
 
SPY has imploded 5.13 to 213.32 on Friday easily cutting through 30 delta had one had put on a trade earlier at the start of week. Most likely all spreads would have ended under water.

Meanwhile -
BK is down 50c position is now 37 delta still OTM.
AXP is down 1.12 and the position is now 36 delta still OTM.
TEVA is down 83c and the position is now 34 delta still OTM.

Seems to be a straightforward decision on which is a better approach.
 
I've been trading naked put / call strangles against the SPX / ES for just under five years. I've tried to document my strategy on the Yahoo group that tracks Karen the super trader. For what it's worth, I think her particular strategies are dangerous and unlikely to generate the returns that she claims without significant risk taking by the option seller.

But I do sell options, increasingly at straddles or very close to ATM with very few days to expiration, and have developed a large variety of adjustment techniques when the market moves away from the expiration.

Over the past five years, I have averaged a 20% annualized return by smartly using leverage. My biggest drawdown was around 14-ish percent when the market was screaming upwards. I've had good and bad years, as the returns are lumpy. But the returns always show up as I trade a method where I do maximum safe leverage as my opening trade, and all subsequent trades are about reducing leverage and risk. Sometimes the NLV goes negative, but through adjusting it always eventually turns positive.

On the theory that someone always needs to lose money if someone is making money. My understanding is that market makers are able to take the opposite side of an options trade by being delta neutral by executing a matching opposite transaction with ES futures, which has high volume. So the counter party is someone that took a long or short position in futures at the time the contract was opened. I'm not entirely confident on the entire process - but some framework like this is what allows for some parties to open 1000s of contracts at a time.
 
NPTrader said:
On the theory that someone always needs to lose money if someone is making money. My understanding is that market makers are able to take the opposite side of an options trade by being delta neutral by executing a matching opposite transaction with ES futures, which has high volume. So the counter party is someone that took a long or short position in futures at the time the contract was opened. I'm not entirely confident on the entire process - but some framework like this is what allows for some parties to open 1000s of contracts at a time.
More...
NPT, I have been struggling with the same thoughts and asked the ETers quite a few times on this. Your answer is what was given by the experts and market makers that posted here when I asked. I think on high volume index options there will always be traders willing to take the opposite trade and the market makers just act like agents collecting bid/ask spreads and commissions. However, on thinly traded options, especially DITM and DOTM there may not be counter parties taking the opposite trade and so the market makers are taking the opposite side. They then hedge their position with a future or long/short stocks that is delta neutral.

Someone please correct me if I am wrong.
 
SpanishMainCapital said:
But it is not equally profitable the stat proves it, who said they are?

It is more likely that a Black Swan type event will not occur than it will occur. Therefore those occurrences are rare, hence the insurance and also the probability that sellers of insurance profit more than buyers.
More...
I am still puzzled by your report. How can they all be profitable? That means all of us options traders make money, whether going long or short, call or put, over a 10 year period, we all make money and over a 20 year period we all do better than investing in the underlying?
 
NPT, I have in my head a strategy but dont know if it will work:

Sell ATM or OTM 8xcovered Calls on QQQ, Long 800 Share QQQ and protect the down side with short NQ future.

The Idea is to create neutral strategy with QQQ and NQ, and from benefit selling calls.

Im looking for 1-2% per month with low risk, is it possible, anything else I should consider?

Thanks
 
I don't get the people who use TDA and employ leverage. The difference between their margin rate and IB is so large that if one could borrow at IB's rate and lend at TDA's rate one would be pretty happy with that return on an unleveraged basis ;)

I like TDA's software and no autoliquidation risk, but I can't seem to get away from IB's really nice margin rate.
 
IB is for pros who trade the markets in size...market makers, HTFs, and such. ameritrade is for noobs who like paying fat commissions and huge margin rates because they are intimated by a 'real' broker or just don't know better.
 
Last edited:
ironchef said:
According to your source then, everyone made money, whether you went long or short, calls or puts if you had a 10 year or even better 20 year horizons?

How do you explain the "zero sum" hypothesis of trading: Namely if the buyer of an option makes money, the seller must lose the same amount?
More...

Yes, quite a study this was; So : 100% of option traders win, they just win !
 
You must log in or register to reply here.
Back
Top