NexusFi: Find Your Edge


Home Menu

 





Naked puts, options, lots to learn


Discussion in Options

Updated
      Top Posters
    1. looks_one sam028 with 4 posts (5 thanks)
    2. looks_two meyer99 with 3 posts (1 thanks)
    3. looks_3 Delta_Panther with 2 posts (0 thanks)
    4. looks_4 shodson with 2 posts (2 thanks)
      Best Posters
    1. looks_one tigertrader with 6 thanks per post
    2. looks_two Fat Tails with 2.5 thanks per post
    3. looks_3 mattz with 2 thanks per post
    4. looks_4 sam028 with 1.3 thanks per post
    1. trending_up 14,287 views
    2. thumb_up 34 thanks given
    3. group 17 followers
    1. forum 28 posts
    2. attach_file 8 attachments




 
Search this Thread

Naked puts, options, lots to learn

  #21 (permalink)
 pgain 
Easton CT USA
 
Experience: Intermediate
Platform: Tradestation
Trading: ES
Posts: 4 since Oct 2010
Thanks Given: 0
Thanks Received: 0

naked puts are fine to trade.
But you better do a lot of studying and know exactly what you are doing and why.
Just write one contract for several months and watch how they preform make 50 or 60 bucks here and there and get a feel for it


If it is a stock you want to own anyway and would have no problem getting 100's of shares at a discount
write some puts and wait for the price to come to you.
Writing one or two a month is fine.
the problem is when people get greedy and over leveraged they see the money start to come in monthly selling puts and over expose themselves

Remember if you are a put writer and the over all market turns ( Tanks )you are going to get killed having all you positions put to you. to much one direction bias.


But if you only held a few small positions a month it can be done safely.

As for spreads in my opinion they are much more dangerous than Naked puts. when they hit total loss.
With naked puts you will own the stock and it probally will come back in a month or two.
Actually most brokers will only let you write "cash secured puts" you have to have the dollars in your account to back you the trade


Good luck and go slow.....................Just my 2 cents...........

Reply With Quote

Can you help answer these questions
from other members on NexusFi?
My NT8 Volume Profile Split by Asian/Euro/Open
NinjaTrader
NexusFi Journal Challenge - April 2024
Feedback and Announcements
Exit Strategy
NinjaTrader
New Micros: Ultra 10-Year & Ultra T-Bond -- Live Now
Treasury Notes and Bonds
Are there any eval firms that allow you to sink to your …
Traders Hideout
 
Best Threads (Most Thanked)
in the last 7 days on NexusFi
Get funded firms 2023/2024 - Any recommendations or word …
61 thanks
Funded Trader platforms
38 thanks
NexusFi site changelog and issues/problem reporting
27 thanks
The Program
18 thanks
Battlestations: Show us your trading desks!
18 thanks
  #22 (permalink)
 MXASJ 
Asia
 
Experience: Beginner
Platform: NinjaTrader, TOS
Posts: 796 since Jun 2009
Thanks Given: 109
Thanks Received: 800

The last time I traded naked puts was October 2008, using a strategy that required more testicular fortitude than brains. Let's just say it wasn't my brains that were handed to me on a platter .

I would write naked puts again as part of my long-term core holdings, though, to reduce my cost basis. As pgain points out it does tie up cash, so you need to consider the opportunity cost of that (over and above Rho) when you decide if and what to write.

For example (and don't do this please), if I wanted to add to my Emerging Markets exposure in my long-term portfolio I might consider writing some March 42 EEM Puts. For every put I write, I receive $115 but my broker will require me to keep $4,200 in cash. Between now and March could I make more than that using that $4,200 as margin to day trade 6E or something else? That's the kind of thing you need to consider.

And of course if EEM drops to 18 again between now and March you are in for a bit of pain, but that works for some long-term.

Then there is the whole Vega thing but let's not go there now...

Reply With Quote
  #23 (permalink)
 fluxsmith 
Santa Maria
 
Experience: Advanced
Platform: NinjaTrader, ThinkOrSwim
Broker: Mirus/Zen-Fire
Trading: ES
Posts: 290 since May 2010
Thanks Given: 97
Thanks Received: 322



Fat Tails View Post
...So I am not touching options, as it is far more complicated than trading straight instruments. I admit that I have once sold covered calls.

I'm always amused by the misconception (not saying Fat Tails has it) that naked puts are risky and covered calls are conservative. For a non-dividend paying stock they are virtually identical. A naked put could be considered a synthetic covered call.

Visit my NexusFi Trade Journal Reply With Quote
Thanked by:
  #24 (permalink)
 
tigertrader's Avatar
 tigertrader 
Philly, Pa
Legendary Market Wizard
 
Experience: Master
Platform: NinjaTrader
Trading: ES, ZB
Posts: 6,482 since Jul 2010
Thanks Given: 6,662
Thanks Received: 36,257

The bible on options trading has always been recognized as " Options as Strategic Investment" by Lawrence McMillan

I would also highly recommend:


Option Volatility & Pricing
by Sheldon Natenberg - the bible on vol

The Volatility Edge in Options Trading
by Jeffery Augen - one of the best books on vol

and
Options Trading by Charles M Cottle - because I used to trade with him and he's a friend

Please notice that volatility is a recurring theme in the above titles. If you are going to trade options you need to understand 3 things...volatility, volatility, and volatility.

Follow me on Twitter Reply With Quote
  #25 (permalink)
 
Jura's Avatar
 Jura   is a Vendor
 
Posts: 775 since Apr 2010
Thanks Given: 2,352
Thanks Received: 690

Interesting thread here. I got an short naked options question, and I was hoping that someone could help me out.

I was calculating the results of an Short Strangle (selling out-of-the-money put and the selling of an out-of-the-money call with the same expiration date). Let's say you sell a call with an exercise of 420, and a put with an exercise price of 330. The underlying index currently trades at 370, and you receive an premium for selling both options of 1.20, which results with an contract size of 100 into $120.00. With that, I calculated the following results at expiration: (see attachment)

My question is: are these values correct? I've triple checked my calculations, but the risk/reward ratio seems so way off (earning a combined premium of 120 and potentially losing 5000 when the underlying moves more than say 14%). I know that these option strategies have high risk compared to their received premiums, but this extreme?

Attached Thumbnails
Click image for larger version

Name:	tmpOptionQuestion.PNG
Views:	274
Size:	32.0 KB
ID:	31427  
Reply With Quote
  #26 (permalink)
Arpeggi
Chicago, IL
 
Posts: 35 since Feb 2011
Thanks Given: 19
Thanks Received: 36


Jura View Post
Interesting thread here. I got an short naked options question, and I was hoping that someone could help me out.

I was calculating the results of an Short Strangle (selling out-of-the-money put and the selling of an out-of-the-money call with the same expiration date). Let's say you sell a call with an exercise of 420, and a put with an exercise price of 330. The underlying index currently trades at 370, and you receive an premium for selling both options of 1.20, which results with an contract size of 100 into $120.00. With that, I calculated the following results at expiration: (see attachment)

My question is: are these values correct? I've triple checked my calculations, but the risk/reward ratio seems so way off (earning a combined premium of 120 and potentially losing 5000 when the underlying moves more than say 14%). I know that these option strategies have high risk compared to their received premiums, but this extreme?

Try graphing what it will look like before expiry. Option p/l graphs are always a little misleading because they only tell you what is going to happen at expiry, not with 200 or 100 DTE. Before then, you might have to find an iron stomach to endure the stress.

Reply With Quote
Thanked by:
  #27 (permalink)
 fluxsmith 
Santa Maria
 
Experience: Advanced
Platform: NinjaTrader, ThinkOrSwim
Broker: Mirus/Zen-Fire
Trading: ES
Posts: 290 since May 2010
Thanks Given: 97
Thanks Received: 322


Jura View Post
...I've triple checked my calculations, but the risk/reward ratio seems so way off (earning a combined premium of 120 and potentially losing 5000 when the underlying moves more than say 14%). I know that these option strategies have high risk compared to their received premiums, but this extreme?

Haven't checked your math, but the picture looks right, and yes, the losses on a short strangle or straddle can certainly be that extreme. If you find a short strangle otherwise appealing, I think you need to look at Iron Condors.

Visit my NexusFi Trade Journal Reply With Quote
Thanked by:
  #28 (permalink)
 meyer99 
Charlotte NC
 
Experience: Advanced
Platform: Charts:TOS, execution:TOS
Broker: TOS
Trading: SPX, RUT. TQQQ, Stocks, /YM
Posts: 234 since Jul 2009
Thanks Given: 99
Thanks Received: 122

Just wanted to show what we can chart now with Kinetick EOD.
This chart shows the ES and its associated volatily: the VIX. There are volatility indexes for oil, gold, euro, etc. Search on the CME web page if you need them.
To get VIX on Kinetick edit the symbol to read VIX.XO and point to CBOE for exchange. Same for other indexes.
Do this while connected to Kinetick.
I hope it helps.

Attached Thumbnails
Click image for larger version

Name:	IV.jpg
Views:	289
Size:	190.4 KB
ID:	31962  
Reply With Quote
Thanked by:
  #29 (permalink)
 
gvv1965's Avatar
 gvv1965 
Rome, Italy
 
Experience: Intermediate
Platform: TradeStation
Trading: ES, Options
Posts: 12 since Mar 2011
Thanks Given: 10
Thanks Received: 20


Jura View Post
I was calculating the results of an Short Strangle (selling out-of-the-money put and the selling of an out-of-the-money call with the same expiration date). Let's say you sell a call with an exercise of 420, and a put with an exercise price of 330. The underlying index currently trades at 370, and you receive an premium for selling both options of 1.20, which results with an contract size of 100 into $120.00. With that, I calculated the following results at expiration: (see attachment)

My question is: are these values correct? I've triple checked my calculations, but the risk/reward ratio seems so way off (earning a combined premium of 120 and potentially losing 5000 when the underlying moves more than say 14%). I know that these option strategies have high risk compared to their received premiums, but this extreme?

Jura,
I just joined futures.io (formerly BMT), so sorry for the late answer and especially for my italo-english.
There are a few biases in your analysis; some of them has already been underlined, other not.
Let's start with the first one: your expectations. when selling a straddle or a strangle, you are playing eminently a range game, i.e. you expect your stock (ETF or whatever, call it ABC) will be in a range from now to expiration AND/OR you expect that ABC, after maybe an explosion in volatility, will calm down and therefore volatility will decrease.
Going into more esoteric details, you are playing a negative theta game, i.e. you expect the time to work for you, by decreasing the value of your short options day by day (but this is indeed something that becomes much more visible near expiration and if volatility is decreasing, that is equivalent to -let say- a shortening of time remaining). Finally, if you are an option expert, you might want to play some negative gamma scalping, but that's probably too far for your experience.

Second issue: Naked Options Variables, like Expiration and Volatility, just to cite the most important. How far are the expiration are you calculating expected results for? 1 day? 1 month? more?. As per the previous point, the nearer the expiration, the higher the theta, i.e. the value the naked options lose each and every day. What is the volatilty of ABC and the implied volatility embedded into your options? The greater the volatility, the greater the value of the options you sell and the returns, of course, BUT the greater also the risk, since a volatile issue has much more chance to go beyond the boundary of your strangle AND is not affected that much by the effects of time passing by, until the very days before expirations.

Let's see an example, made with a sample stock, approx 60 DTE (exp on May 20th, 2011), an average volatilty of 20%. These parameters yelds a 119 credit selling the options (like in your case), that is your maximum gain potential. Please note that in a short strangle, your maximum loss is unlimited so it's a matter of probability whether you will be proftiable or not. In other words, what is the probability that ABC will be btw 329 and 431 by expiration?
Assuming that our current volatility estimate (20%) is correct, by May 20th you have almost 90% of chances that ABC will be in your sweet spot of profit, however, if volatility grows to 30% in the period (or if for whatever reason the implied volatility of options grows) your chance of profit falls to 72,6%; 58,8% if it doubles to 40%.
Do not forget, furthermore, that, if volatility increases, it's like if time to expiration slows down, so your naked options lose less and less of their value (and this is not good for your position).
These are only estimates and they ar as good as the underlying model is (garbage in - garbage out), so the question is: why unlimited risk naked premium if you can choose some limited risk strategies, still based on naked premium, but not endangering your financial and mental health.
Using the same parameters above, buying a further OTM strangle (450 call and 300 put) will cost you less than 15 bucks and will limit your exposure to 2895 on the downside and around 1900 on the upside.
As per my experience, I think that naked premium selling is only for hugely capitalized guys, who can afford shorting premium-rich ATM or near-the -money options in a variety of markets, playing the odds of probability, but always having some further OTM options long as "protective wings" for their naked position, being therefore protected, should the black dawn materialize from time to time (more often recently), that same black dawn that destroys our "private ryan's" positions and accounts.

Follow me on Twitter Reply With Quote
Thanked by:




Last Updated on March 20, 2011


© 2024 NexusFi™, s.a., All Rights Reserved.
Av Ricardo J. Alfaro, Century Tower, Panama City, Panama, Ph: +507 833-9432 (Panama and Intl), +1 888-312-3001 (USA and Canada)
All information is for educational use only and is not investment advice. There is a substantial risk of loss in trading commodity futures, stocks, options and foreign exchange products. Past performance is not indicative of future results.
About Us - Contact Us - Site Rules, Acceptable Use, and Terms and Conditions - Privacy Policy - Downloads - Top
no new posts