And you forget one more: Donald Trump. Went bankrupt at least TWICE. Look at him now? LOL
Wiped out selling naked puts with no stop loss or credit spread
- Thread starter R3LZX
- Start date
And you forget one more: Donald Trump. Went bankrupt at least TWICE. Look at him now? LOL
I find with the drop in Option premiums nowadays, credit spread is no longer worth it; you are looking at earning just a few cents on a dollar. With that amount of spread, I might as well sell deeply OTM options and I would save on commissions. If I am going to buy the other leg, I might as well buy/sell the underlying, I would get much higher profit potential. The whole idea of selling naked options is to be compensated for the potential buyside profit that you are giving up but if I would still have to buy the other leg of the option for protection then it just defeats the whole purpose. It's like driving a Ferrari with parking brakes on. LOL
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There are always exceptions. Like Peter Lynch’s Magellan fund.
But the funny thing is that while his average annual return was 29%, the average investor in the fund actually lost money.
You know why? Performance chasing.
Peter Lynch was an amazing money manager, probably better than anyone. to think that there were investors not happy with that kind of a return is just crazy. I have read all his books but I did not know / remember this.
Is the drop in premium you talk about mostly due to the low-vol environment? I know the value of options increases with IV, but it's been difficult to understand if option writers are getting compensated more for the service itself of providing them during higher IV, or if they are simply getting more $$ up front comensorate to the higher risk they're taking on. I.e. higher probability of strikes further out getting hit.. intrinsic values of the option expiring ITM being greater than they otherwise would be in lower vol since the market moves further in less time, etc.
Short of a model for accurately predicting directional bias, what kinds of conditions lead to greater amount of premium offered for writing options that isn't purely just compensation for excess risk? Any thoughts?
The problem was not them not happy. Lynch himself pointed out a fly in the ointment. When he would have a setback, for example, the money would flow out of the fund through redemptions. Then when he got back on track it would flow back in, having missed the recovery.
This is the very definition of Buy High Sell Low:
What you want is a hedge on those short puts. What wipes a lot of people out is complacency, they get used to the profits and think they are on to something and then BOOM! black sawn lands on your lap and your wiped out.
A lot of people think selling a shit load of puts on outlier options is safer than selling a small number of near the money contracts. And always put a floor on your risk with a long put option to give your safety in the event of the black swan. Better to make less in each trade but lose a little during a bad event VS try to make bigger returns but get wiped out on one bad event.
In the end all the smaller profits will add up to a big profit.
no such thing a a free lunch.
A lot of people think selling a shit load of puts on outlier options is safer than selling a small number of near the money contracts. And always put a floor on your risk with a long put option to give your safety in the event of the black swan. Better to make less in each trade but lose a little during a bad event VS try to make bigger returns but get wiped out on one bad event.
In the end all the smaller profits will add up to a big profit.
no such thing a a free lunch.
Learn to love Black Swans.
