Wiped out selling naked puts with no stop loss or credit spread

[monkeyc]

Nakeds aren't dangerous unless you make them that way, which many people do. I've sold them for 20 years and have gone through Black Swans far worse than this. It's all about taking appropriate leverage.

If you blew out when ES fell only 10% in 4 days, then you were over-leveraged. On my Black Swan richter scale, Feb 1-6 was a 5 out of 10 -- nothing special. I expect events like that happen every 2-3 years.

 

[spindr0]

I don't know a lot about options...Just what I have read and heard (over 20 years). I have always heard that the naked put option is the most dangerous option out there. Even with a stop loss, if there is no market (think 2000 tech bubble or 2007 financial crisis) your assets can be completely wiped out. Also couldn't the large institutions still jump ahead of you in different ways?? Just asking...

And yet you sell covered calls which is equivalent to short puts. Unless you leverage yourself, it's the same result, good or bad.

No one can jump in front of you. How fast you draw and shoot your order for execution determines what your fill price is (whatever the ask price is).

 

[spindr0]

I sold naked option before. It was very painful experience. Selling naked option is inherently terrible due to its terrible risk reward ratio. I will never do such thing anymore.

And yet the public is sold a bill of goods that selling covered calls (equiv to short put) is a safe strategy. Safe for the broker, not the investor.

 

[spindr0]

Selling naked puts is akin to picking up pennies in front of a steamroller. Sooner or later you slip and fall and get crushed.

Stop loss isn't going to help either since a big event will trigger a selloff and you are not going to be able to get out in time.

Spreads make more sense. You have a predefined risk and reward.

Also known as "With short puts and covered calls, most of the time you eat like a bird and sometimes you sh*t like an elephant."

Yes, spreads make more sense and for those who own the underlying, collars (both are equivalent).

 

[R3LZX]

Nakeds aren't dangerous unless you make them that way, which many people do. I've sold them for 20 years and have gone through Black Swans far worse than this. It's all about taking appropriate leverage.

If you blew out when ES fell only 10% in 4 days, then you were over-leveraged. On my Black Swan richter scale, Feb 1-6 was a 5 out of 10 -- nothing special. I expect events like that happen every 2-3 years.

you are correct, I should have only been selling 5% to 7% of my total account. with a 50% put purchase closer to the money as well for safety. Thanks for your input

 

[MattZ]

Anyway - what you did wrong was not to follow your plan - simple as that. Professionals dont make these mistakes because they are paid not to be on a plane when their portfolio threatens to be blown out.

If you look at the landscape of CTAs, Funds, and other money managers who were engaged in shorting volatility, you would see that professionals were just as affected as retail if not more on Feb 5, 2018. This was reflected in two ways:
1) The losses and drawdowns that pros had 2) The additional funds some FCMs had to infuse to meet regulatory requirements.

 

[Kim Klaiman]

So I had about 100K in ES and was just cruising along with the normal expectation that it would easily bring in some pennies as always, (about 12K)

Could you please clarify what does it mean? You were getting 12k credit (12%) per month in 100k account?

Sorry if you mentioned it elsewhere.

 

[Mugono]

You guys are getting blown up because you're selling OTM/strangle type stuff and juicing it up to get a reasonable return. Sell closer to the money and less of it. You'll have an easier time hedging it when the bid/ask spread gets stupid as well.

+1.

My 2 cents:

Selling wings have terrible risk characteristics. Sure, the risk premium may, at times, be attractive but I suspect with this strategy; leverage and time / theta is the sauce needed to generate acceptable $ profits.

The main downside with OTM selling is the accumulation of gammas and vegas, which both work against the OTM put seller. Food for the @op to consider as possible mitigants for this strategy:

(1) Bound the short strike by purchasing a further OTM strike does help. Increase the number of contracts, as appropriate. The risk / reward is at least bounded.
(2) I like the idea from @QuasWexExort of buying further out in time (ratio) backspreads. The short premium will help (partially) pay for the long premium.
(3) The OP could also think about selling OTM puts further out in time. This is effectively a vega (not theta) play but has the benefit of being less exposed to gamma (gammas will accumulate but not as quickly as the front month).
(4) Sell closer to the money / ATM. Higher premium and exposure to theta, vega, gamma is at its maximum. The gamma declines as the underlying moves against you so is easier to hedge. May need to actively manage this position unless the downside is capped (i.e. converted to a vertical as per (1)).

 

[Bekim]

The safest way to sell naked in my opinion is to only sell enough that you can take the shares when assigned. You might get screwed for a bit but you won’t blow up you account.

 

[Mugono]

The safest way to sell naked in my opinion is to only sell enough that you can take the shares when assigned. You might get screwed for a bit but you won’t blow up you account.

The only downside will be that the $ dollar profits will be lousy