When SPY Sells off 5% in Two Days

[OTM-Options]

Really? OK, what about sellers of OTM call credit spreads? How did they do? Did they get creamed?

No. They made money.

Could you quote my post(s) you are referring to?

You're an idiot. Like most idiots, you don't know you're an idiot. And if I were talking about iron condors, I would have used the words "iron condor". Gah.

Could you quote my post(s) you are referring to?

Once again you are taking the discussion out of context. Perhaps you could take the time and read the thread before you post and not be so hostile and defensive.

 

[ET180]

No way man. OTM puts mean you're going to be short gamma and vega vs a delta 1 underlying. Unless you hedge continuously or quickly you could see explosive increases in option prices you're short on going from a low to high volatility environment. Obviously time to expiration and strike are involved here but OTM positions are only going to get worse the closer they get to ATM.

I think the fact that you walked away with little loss means you might be selling very OTM and such positions have insidious risk baked into them. You're skirting a dangerous edge with "probability" here.

I said: "I think it's safer to short OTM put options than holding the same quantity of stock." By definition, you're taking less risk by shorting OTM put options vs. holding the same quantity of stock. Think about it. If I have 100 shares of XYZ trading at $100 / share, then I have $10,000 of risk. Shorting an OTM put by definition implies that I sold a put at a strike price somewhere less than $100 / share, otherwise it would not be an OTM put. So if I get assigned the put, (worst case) then I get 100 shares of the underlying at some prices less than $100 / share. Therefore, I'm taking less risk than if I had bought the stock. So my previous statement is factually correct.

The principle is to never sell a naked put on something if you're not prepared to take assignment. So there are times to short options and there are times not to short options. And yes, if risk enters the market, be prepared to close positions quick.

Btw, selling OTM can be very profitable if done correctly:

 

[der_kommissar]

The principle is to never sell a naked put on something if you're not prepared to take assignment. So there are times to short options and there are times not to short options. And yes, if risk enters the market, be prepared to close positions quick.

Btw, selling OTM can be very profitable if done correctly:

Wait until some of these stocks gap down 10-15%...I'm not implying it happens next week or next month (although it might), but if you were in these markets back in 2000-02 and then in 2007-08, many stocks gave up 70-80% from their peak prices...It's really about doing this stuff in the right "market cycle". If you keep using bull market tactics in a bear market, you will get annihilated, it's just that simple...

And the risk in these trades isn't in the intra-day action it's the "jump's" when it's halted or gaps lower and you can't manage that risk, you just eat a huge loss.

 

[i960]

Yay another Karen the super trader follower who's probably never been through 2000 or 2008 and thinks OTM put selling is the bees knees because delta is the only thing that matters right?

ET180: If you get a significant gap down or sell off coupled with a huge spike in volatility you're going to watch those OTM puts go up by 10-30x in value! At that point your broker steps in and liquidates your ass in a wide spread market before you can even say "so what if I get assigned the put?" Gamma *and* VEGA dude!

This is straight up Niederhoffer territory and there must be a 100 threads on this type of thing already explaining the various scenarios and risks but people still do these "sure thing" option trades because all they think is "easy money." There are no free lunches.

 

[newwurldmn]

It is safer to be short otm puts vs the same amount of stock. That is obvious.

But for that safety you pretty much give up ALL the upside. In the long run that upside can be more meaningful than the safety protection.

 

[ET180]

It is safer to be short otm puts vs the same amount of stock. That is obvious.

Well, not obvious to everyone in the ET community apparently...

But for that safety you pretty much give up ALL the upside. In the long run that upside can be more meaningful than the safety protection.

Right. If you really believe that an asset will take off, you either buy the asset directly or buy a call option.

 

[ET180]

Wait until some of these stocks gap down 10-15%...I'm not implying it happens next week or next month (although it might), but if you were in these markets back in 2000-02 and then in 2007-08, many stocks gave up 70-80% from their peak prices...It's really about doing this stuff in the right "market cycle". If you keep using bull market tactics in a bear market, you will get annihilated, it's just that simple...

And the risk in these trades isn't in the intra-day action it's the "jump's" when it's halted or gaps lower and you can't manage that risk, you just eat a huge loss.

NFLX did not gap down, but it did drop 26% last week so that's pretty significant. Your argument could also be used against those who own stocks directly without paying for protection. Any stock can gap down 25% overnight or during the next geopolitical event. It's just a matter of probability.

You're right about market timing...in a bear market, don't short put options unless you want to use the put to exit a short position on the underlying...possibly by using it to finance a long call to lock in gains.

 

[ET180]

ET180: If you get a significant gap down or sell off coupled with a huge spike in volatility you're going to watch those OTM puts go up by 10-30x in value! At that point your broker steps in and liquidates your ass in a wide spread market before you can even say "so what if I get assigned the put?" Gamma *and* VEGA dude!

Do you understand how puts work? The maximum value of the put is realized when the underlying goes to $0. For example, I had a NFLX 118 put. The maximum value of that put is $11800. The other puts were lower and I closed them while they were still OTM. Everyone trades differently, but all puts were cash secured and I could have taken assignment on all my positions without using any margin / borrowing. So no, my broker would not have liquidated my ass and as I have been explaining, I'm taking less risk than owning the underlying directly.

This is straight up Niederhoffer territory and there must be a 100 threads on this type of thing already explaining the various scenarios and risks but people still do these "sure thing" option trades because all they think is "easy money." There are no free lunches.

Same argument can be made about owning stocks, particularly owning stocks on margin. I never argued that there was a free lunch or that my trading style is what everyone should be doing. So why don't you share your strategy with us? I'm always interested in new strategies.