You are correct in your analysis that tail events pose risk with the naked calls. A significant portion of this risk can be eliminated/hedged with complex options orders (think double diagonals/ broken wing butterflies/ standard butterflies).

Wow... wow... wow...

I feel like I've spent all day arguing the same points!

You CAN'T predict price. You can strategize yourself and your trading around it but you cannot predict anything about the future of the market in enough detail to ever call it a prediction.

My strategy as I have laid it out is ultimately be at the largest position size relative to my MAX risk at the point of maximum excursion.

Thats the idea. The theory part. Reality is of course much different.

I want to be able to average my position as it goes against me simply because I want to be at the highest position possible at the maximum excursion having the most contracts when it does go in my direction.

If I ever perfectly achieve that it will only be luck but never the less that is the goal.

I am going to sit down and do some testing on the additions. Say my limit is 5 contracts. So I have 5 discret contracts to add or subtract.

Now my first contract sets the stage for the rest of the trade. If it goes in my favor I wait for a retacment and add. If it goes against me I add as well.

But... do I add at two times the difference of the last add? Do I add at support levels? Do I add at fixed intervals... at ATR extremes?

If it continues against me is it better to stop out at fixed dollar amount? Scale out according to other risk parameters ect?

These are questions only I can answer.

I get this is extremely amateurish compared to what you are doing but the objective seems to be the same.

And as I also mentioned nobody seems to talk about TIME and EXPOSURE.

Well that's where you, @gregrnoe come in.

I have never actually traded options but have read alot about them and understand them generally vaguely I would say. I dont really know what I dont really know about options. Which is alot.

I do understand what you are saying and believe that we are trading the unknowable and that's the beauty of options.

They can offer an asymmetric risk/reward hedge. It's just beautiful. Your protected against downside risk but still get the upside POTENTIAL.

Minutes before reading this I almost went down the "Cumulative Delta Train" on YouTube. (Thank you for saving me hours and hours)

I know this is me looking for the next indicator. I don't even use indicators anymore. I ways end up abandoning them as a distraction. Just three uncorrelated charts of the market I'm trading.

But YOU my friend have ignited something in me.

OPTIONS. This is not me looking to jump ship or start trading options in the least bit but the addition of additional knowledge is at the root of it. And of course to hopefully gain enough confidence and knowledge to add it to the arsenal.

Could you suggest to someone at a fairly advanced level of the trading landscape but never even traded a single option should go.

In the mean time I think I have a for dummies book on it. (NOT even kidding. Some of those books are fantastic!)

I'm trading the MNQ currently.

I've copied your post to a word processor so I can have as a PDF. Hope you don't mind. (I wont share). The reason is I now have a foundation to focus attention on. Trying to understand what you are doing and learning in the process. Not to copy but to learn.

Thank so much @gregrnoe!

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Sorry didn't see this but are you not glossing over the risk here a bit.

Sure you can hedge and hedge and hedge. All that does is reduce risk to the point of making return just as small in relation? No? Except for fat tails in either direction.

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I want to be very emphatic when addressing this point. Naked options that are far OTM (out of the money, i.e. 10% prob of profit) are extremely risky during tail risk/fat tail events if the naked call option/s is/are the only thing/s put on. I would NOT reccomend using the sale of naked call options alone UNDER ANY CIRCUMSTANCE, to reduce cost basis/ pay for a portion of your put options. However, when you open a very cheap and far OTM butterfly option (about 100 SPX points wide), and park it near the short strike of your call options, well, its quite brilliant, and makes selling your naked calls more stress free. There is only one way to fully understand how much this move eliminates risk. Prove it to yourself in TOS analyze tab, visually of course. Would be glad to show you how it all works out some time.

Cheers.

Greg.

Seriously fantastic advice. Just what I needed. Not going to lie I'm very interested in learning this and how and why it works.

I'm a discretionary trader as it is. I trade using Ninjatrader8 and Interactive Brokers as my broker. Never looked at options on my platform.

I've heard great things about TOS.

In my limited understanding of options I thought "naked" just ment you weren't covered in any way?

But your strategy seems to suggest your always covered?

So I don't understand the "naked" part.

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My understanding, very simply put, is he uses options to create an asymmetric risk reward situation where he hedges and uses the profits from the options to offset the losses of the main position.

Then as the main position comes back in his favor he is, for simplicity sake, out of options with a profit and now has his main position coming back into profits AND his cost average is down. Win/win.

Of course this is ridiculously over simplified but maybe someone can correct me if I'm wrong?

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So, I am not "completely covered". Part of the ambiguity about what I am describing is due to not being able to visualize it on a graph of the profit/loss...however, I am covered in nearly all cirumstances, but not in ALL circumstances. If the S n P rises by 20-30% overnight (literally), this is a scenario that would hurt me financially to a great degree (it wouldn't sink me necessarily), but would be a difficult loss. Now, keep in mind, the market CANNOT do this. The reason is because of the "limit up/down" that are placed by the CME/powers that be. There are up/down limits to price movement. Look up the SandP limit up/down "circuit breaker". This protects me some, but a 20-30 up move overnight in the S and P is unheard of to my knowledge (correct me if I am wrong) historically.

Cheers.

Greg.

This is an accurate simplification of my strategy for the most part. My best advice to any novice/intermediate trader is to give up on "predicting direction", and find a way to change your thinking/mindset on how to be profitable no matter what direction the market takes. Anyone with experience knows that if you try to completely eradicate risk, you end up reducing profit potential to zero. However, there are very creative ways to profit as price goes down (i.e exploiting volatility expansions in options, using correlated or front/back month futures to hedge risk, using complex options orders such as butterflies and double diagonals to exploit price movements with kurtosis/extreme skew based trades), so why would you ever only try to profit as price rises/goes in one direction. PERSONALLY, I am not psychologically strong enough to hold losing positions, unless I justify that hold by sword fighting (fencing if you will) my way to profit, even when price moves against my primary position (usually long). Hope this makes some sense.

Cheers.

Greg.

Bravo op! Thank you for sharing!!!