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

[misterkel]

I have always heard that the naked put option is the most dangerous option out there. .

There is a funny myth about this - naked puts are very dangerous and covered calls are a conservative, safe trade.
However, the two trades (at the same strike / expiry, of course) are exactly identical in their P/L outcomes and holding results. Not accounting for bid-ask spreads, but on SP instruments, this isn't really an issue.

 

[Kim Klaiman]

We all still remember the story of Karen Supertrader: Too Good To Be True? who was selling naked options till the market went against her. How To Blow Up Your Account discusses it and tells a story of Victor Niederhoffer who had one of the best track records in the hedge fund industry, compounding 30% gains for 20 years. Yet, he blew up spectacularly in 1997 and 2007. Not once but twice.

And lately, we heard about The Spectacular Fall Of LJM Preservation And Growth fund who lost 80%+ in 2 days and went out of business.

What most experts are missing is the simple fact that the problem is not the strategy. The problem is leverage. Strategies don't kill accounts. Leverage does.

Now, OP "just cruising along with the normal expectation" of 12%/month?? Seriously? And now he is surprised that he blew his account? Most fund managers don't make 12%/year, but he expected to make 12%/month..

 

[Bekim]

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

Not if you time it right

 

[EliteThink]

One thing we do is buy 2 for every 1 sold, for a credit. If you can invert vega, crash become much more manageable. sorry for the losses.

 

[Mugono]

Not if you time it right

That conditionality is awesome

 

[R3LZX]

We all still remember the story of Karen Supertrader: Too Good To Be True? who was selling naked options till the market went against her. How To Blow Up Your Account discusses it and tells a story of Victor Niederhoffer who had one of the best track records in the hedge fund industry, compounding 30% gains for 20 years. Yet, he blew up spectacularly in 1997 and 2007. Not once but twice.

And lately, we heard about The Spectacular Fall Of LJM Preservation And Growth fund who lost 80%+ in 2 days and went out of business.

What most experts are missing is the simple fact that the problem is not the strategy. The problem is leverage. Strategies don't kill accounts. Leverage does.

Now, OP "just cruising along with the normal expectation" of 12%/month?? Seriously? And now he is surprised that he blew his account? Most fund managers don't make 12%/year, but he expected to make 12%/month..

Thanks Kim for your insight. I was normally selling about 24 and buying about 12k in a back ratio. This wasn’t the case because I neglected to buy the 12k closer to the money. And of course I was way over leveraged.

Bottom line I was over leveraged and had no parachute whatsoever. My fault

 

[R3LZX]

One thing we do is buy 2 for every 1 sold, for a credit. If you can invert vega, crash become much more manageable. sorry for the losses.

Elite, this is definitely a lot safer, when I come back (and I will come back) I will definitely be looking at this strategy.

As I type this I am moving out of my office and this has been a real wake up call, I urge all of you moving forward to please please please listen to me and do not over leverage your accounts. in the event you are selling naked top or bottom, make sure you only risk a minimum of about 5% of your portfolio, and if its SPY etc, make sure you actually own the ETF you are selling options in, And aditionaly that you protect that with a put / call purchase of at least half of that amount!

 

[R3LZX]

+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)).

Thank you very much for this advice and this post

 

[R3LZX]

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.

Over leveraged, GREED, and of course downright stupid. 100K account. sold 24K (roughly) on Feb 5th without buying any protection puts closer to the money. (normally would buy half this amount for balance)

 

[R3LZX]

We all still remember the story of Karen Supertrader: Too Good To Be True? who was selling naked options till the market went against her. How To Blow Up Your Account discusses it and tells a story of Victor Niederhoffer who had one of the best track records in the hedge fund industry, compounding 30% gains for 20 years. Yet, he blew up spectacularly in 1997 and 2007. Not once but twice.

And lately, we heard about The Spectacular Fall Of LJM Preservation And Growth fund who lost 80%+ in 2 days and went out of business.

What most experts are missing is the simple fact that the problem is not the strategy. The problem is leverage. Strategies don't kill accounts. Leverage does.

Now, OP "just cruising along with the normal expectation" of 12%/month?? Seriously? And now he is surprised that he blew his account? Most fund managers don't make 12%/year, but he expected to make 12%/month..

Kim these are excellent articles. and I see that you wrote them, Thanks for sharing them. Also just so you know, I was correct on my NG trading for the months of Nov, Dec, and Jan. I am exposed to this industry, so I had a good idea I would be right based on raw fundamentals. With the boring but very liquid ES I simply got over confident, thought the bottom was in after Fridays sell off. Very much like the decision Victor Niederhoffer made. and what a foolish decision it was. I was selling the 1800's. so I was far OTM, but again no protection and over leveraged.