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Selling " Naked " Calls and the Margin....


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Selling " Naked " Calls and the Margin....

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  #1 (permalink)
Memphis,TN
 
 
Posts: 232 since Sep 2010

Good Afternoon,
a fellow member made the following comment...
" i've decided to never sell naked calls, which are the very risky strategies that blow people's accounts. it's definitely a different dimension learning options "

I was wondering if someone could please elaborate on the reason why selling " Naked " Calls is so much more risky then it is to sell ' Naked ' Puts ?

My thinking behind it is because a stock can go to $0 , and because of this, the risk is that much greater, since selling Naked Calls is a Bearish strategy and you are expecting the stock to drop ?

I have also noticed that the Margin to sell naked calls vs naked puts is a lot higher as well

Thanks in advance for any help
Much appreciated - Michael

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  #3 (permalink)
Market Wizard
Cleveland, OH
 
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Calls are more risky than puts so higher margin. Mainly because of unlimited possible price rise. There is a limit on how much a price can drop.

But I would not rule out trading them. Just be careful.

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  #4 (permalink)
Memphis,TN
 
 
Posts: 232 since Sep 2010

Ron,
Thank you for the explanation

That makes complete sense, for the reasoning for the higher " Risk " , since selling Naked Calls is a Bearish strategy , and a stock / market can go to Infinity in price " to a degree "


May I ask your thoughts on Limit up / Limit Down,
and from all of your years in selling options on the Futures..... have you found a way to " hedge " yourself when these events happen ?
From what I have heard.... you can be locked into a position, with no way to exit the trade for upwards of 2-3 days
PLUS, any stops you had in place will be irrelevant, if the market moved against your position, during the Limit up/down move

Would this only effect you, if you were long a position ( Call or Put )?
But have no impact on you as an Options " Seller " ?


Thank you again for taking the time to answer and follow up on my previous question(s),
I really appreciate it

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  #5 (permalink)
Market Wizard
Linz Austria
 
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mdsvtr View Post
Ron,
Thank you for the explanation

That makes complete sense, for the reasoning for the higher " Risk " , since selling Naked Calls is a Bearish strategy , and a stock / market can go to Infinity in price " to a degree "


May I ask your thoughts on Limit up / Limit Down,
and from all of your years in selling options on the Futures..... have you found a way to " hedge " yourself when these events happen ?
From what I have heard.... you can be locked into a position, with no way to exit the trade for upwards of 2-3 days
PLUS, any stops you had in place will be irrelevant, if the market moved against your position, during the Limit up/down move

Would this only effect you, if you were long a position ( Call or Put )?
But have no impact on you as an Options " Seller " ?


Thank you again for taking the time to answer and follow up on my previous question(s),
I really appreciate it


Limit up or limit down only exists for futures, not for options. You will usually be able to get out of a short option trade, but you will have to pay the price. Only very rarely it happens, that there is absolutely no ask for an option - mainly for very deep in the money options.

Best regards, Myrrdin

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  #6 (permalink)
Memphis,TN
 
 
Posts: 232 since Sep 2010

Thank you Myrrdin for elaborating on the Limit Lock Up/Down

I just finished up reading the ' Complete Guide to Option Selling ", and they too, clarified that Limit Lock up/down are rare, and only ( usually ) only effect Futures traders, Not those selling Options on those futures

Thanks again to you and Ron for all of the helpful insight

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