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Naked puts, options, lots to learn
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Naked puts, options, lots to learn

  #11 (permalink)
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DanPickUp View Post
Does anyone use this kind of software for his option trading strategies ?

ThinkorSwim has a nice options layout where you can analyze spreads, make adjustments on volatility, delta, etc. It's free if you don't mind the delay in options data. I used to trade options, but I don't have the patience to wait for results

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-C

“Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat.” - Sun Tzu
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  #12 (permalink)
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sam028 View Post
This kind of strategy exists, but this guy in wrong for few things.
When you sell a Put (we say writing a put), and at the same time you own the underlying (stocks here), this is not a Naked Put.
This is a Naked Put.
Theoptionsguide.com is, I think, the best website for understanding options, all the most commonly used strategies are there.
There is a lot of books on options, I like this one, for beginners, and then this one, which is really great (how to manage you positions).

In fact, I really love options, it's "slow", not like a crazy future contract, but it can be a very very powerful tools. I'm only playing with options spread, no naked stuff, I like to know, when I pull the trigger, what is my maximum drawdown.

I think every trader need to know, a least, what is an option, how do we play with it, and what are the basic strategies.

Actually, selling puts and being long the stock is, synthetically, 2 long positions. He's just selling puts to lower the cost basis of owning the shares, which works well in periods of high implied volatility, which was yielding nice premiums back then, but also obliged him to buy the shares at his strike price if it continued lower through his strike price through expiration.

Naked puts are a nice way to collect some premium for obliging yourself to purchase someones shares (have the shares "put" to you) at a certain price. It's like getting paid to leave a buy limit order open for a certain amount of time, except the order is only triggered if the contract is exercised in the money, not necessarily if that price level is hit.

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  #13 (permalink)
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shodson View Post
Actually, selling puts and being long the stock is, synthetically, 2 long positions. He's just selling puts to lower the cost basis of owning the shares, which works well in periods of high implied volatility, which was yielding nice premiums back then, but also obliged him to buy the shares at his strike price if it continued lower through his strike price through expiration.

Naked puts are a nice way to collect some premium for obliging yourself to purchase someones shares (have the shares "put" to you) at a certain price. It's like getting paid to leave a buy limit order open for a certain amount of time, except the order is only triggered if the contract is exercised in the money, not necessarily if that price level is hit.


Selling naked puts is like selling insurance to somebody. I am currently not able to calculate the insurance premium and to evaluate the risk. The Black-Scholes formula ignores tail risk, so I do not want to use it. Selling vertical spreads would allow to increase leverage, but I still would not be able to calculate expectancies or backtest option spreads.

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.

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  #14 (permalink)
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For me Naked Option Selling is like a reverse lottery. You collect many times until someone knocks on your door and wants lots of money for the little premium he/she paid. If you want to withstand that kind a drawdown, you need to be capitalized right.

PM with any questions about optimusfutures (800) 771-6748 (561) 367 8686. THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES TRADING.
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  #15 (permalink)
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Naked puts work best when you have a price you want to get into the stock, and collect some premium until price comes down to your price level. The caveat is that once price does come down to your strike, you have to still want to get long at that price as badly as you did when you first sold the put. If exercised, you can trade it, gamma scalp it, sell covered calls, etc, at that point it's a whole new ball game.

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  #16 (permalink)
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@Fat Tails is right, it's more complicated than straight instruments. B&S is not very good, everybody knows the story of LTCM, polynomial models are supposed to be better.

What @mattz is saying is not false, but not totally comprehensive, imvho: naked put (or naked call) are very risky, because of their unlimited potential loss, but you're not supposed to wait to much, if the trade is going in the wrong direction. More than with other instruments, risk management is fundamental.

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  #17 (permalink)
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Selling puts is good when the market is selling off and you think you're picking a bottom in a stock you want to own. Otherwise why not just do a spread? Less risk, less reward, less margin required.

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  #18 (permalink)
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sam028 View Post
@Fat Tails is right, it's more complicated than straight instruments. B&S is not very good, everybody knows the story of LTCM, polynomial models are supposed to be better.

What @mattz is saying is not false, but not totally comprehensive, imvho: naked put (or naked call) are very risky, because of their unlimited potential loss, but you're not supposed to wait to much, if the trade is going in the wrong direction. More than with other instruments, risk management is fundamental.

Actually naked puts on stocks are less risky than naked calls. After all price can only fall to zero, whereas a takeover announcement could multiply the price. For index futures the opposite holds true, as downward volatility is always larger than upward volatility, have never seen a flash rally...

Writing naked puts is a lottery, as long as you cannot calculate the expectancy. I can't. The guys from LTCM couldn't either. They did not write puts, but in a way bond arbitrage is similar as it relies on mean reversion as well.

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  #19 (permalink)
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sam028 View Post
@Fat Tails is right, it's more complicated than straight instruments. B&S is not very good, everybody knows the story of LTCM, polynomial models are supposed to be better.

What @mattz is saying is not false, but not totally comprehensive, imvho: naked put (or naked call) are very risky, because of their unlimited potential loss, but you're not supposed to wait to much, if the trade is going in the wrong direction. More than with other instruments, risk management is fundamental.

I am not sure what you mean by not wait long. Isn't it universal for all trading instruments when you are in a loss?

Here is the real issue with options selling: An instrument could fall /rise by X amount, while the options premium pricing incorporates 5X move way into the future of the underlying instrument. Hence, the premium simply explodes. Take your Delta, Gamma, Theta and they are completely out of whack.

The best example I could use was the Cattle futures that had a move of 150 points limit down about 7 years ago, while the market factored a move of 2,000 points. Way out of the money options were trading like they were in the money.

When you trade options you trade direction, volatility, time and correlation....I'll stick to up or down methods.

PM with any questions about optimusfutures (800) 771-6748 (561) 367 8686. THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES TRADING.
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  #20 (permalink)
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sam028 View Post
You can have a look to Visual Options Analyser here, quite cheap. I use an Excel sheet, based on this one, with some "home made" modifications.

Another cheap option (free) is OptionsOracle at SamoaSky - Stock Options Analysis Tools (Strategies & Volatility Analysis, Strategies Screener).

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