Writing Naked Puts & Calls - Risks

[dalby]

i disagree with one thing

as i said, i use naked puts in an INVESTMENT account, not a trading account

in this respect, they are not a directional bet at all

they are an investment strategy based on perceived value

if i have a stock i want to buy if it goes down to 20 and it is currently at 22, i can sell a naked put.

if the stock never reaches my target entry price, then i collect some premium

if it reaches my target price (a bit below it), then if i get exercised, i have to buy the stock at my strike price

which is where i perceived value in it

this is one way to use naked puts that is not a drectional bet

[TexasTrader]

DALBY:

Yes, I have done the same thing myself and it is a (very) good way to purchase stock.

However, I would contend that when a naked put is used in this way you are not trading options but rather buying stock.

Successful Trading,
TexasTrader

[traderwilliam]

Some years ago, i used to know two guys that used to trade naked put/call to collect the premium. One commit suicided and one went bankrupted. That's it.

[weiwei]

I know a pro oil-gas trader who write call option for his hedge fund, while his fund made a killing for the pass few years, thanks to big valitility in oil and gas for pass few years.

He was doing fine when price of crude oil fractuate in the $18 range. Collected a lot of premium at that time.

But he end up getting fired, he loss a lot of money for the fund on those naked call option, because from what I uderstand on writing call, market have to be calm. not volatility to collect money.

Another thing with stock options, the spread will put you in a big disadvantage. On stock option each step is $5 on stock that is over $30. (this is out of memory, could be other then $30). while if you buy individual stock it is only 1 cent.

I done a calculation a few years back on writing option. You can be 80% to 90% correct and still not making money. In other word, you can be collect those preminum for 8 to 9 time out of 10, but that 1 or 2 time will wipe out you profit.

After that, I stay away from options, there are just too many thing against you on options. Trading stock or futures is easier.

weiwei

[The Bear]

	Quote:	weiwei
	I know a pro oil-gas trader who write call option for his hedge fund, while his fund made a killing for the pass few years, thanks to big valitility in oil and gas for pass few years. He was doing fine when price of crude oil fractuate in the $18 range. Collected a lot of premium at that time. But he end up getting fired, he loss a lot of money for the fund on those naked call option, because from what I uderstand on writing call, market have to be calm. not volatility to collect money. Another thing with stock options, the spread will put you in a big disadvantage. On stock option each step is $5 on stock that is over $30. (this is out of memory, could be other then $30). while if you buy individual stock it is only 1 cent. I done a calculation a few years back on writing option. You can be 80% to 90% correct and still not making money. In other word, you can be collect those preminum for 8 to 9 time out of 10, but that 1 or 2 time will wipe out you profit. After that, I stay away from options, there are just too many thing against you on options. Trading stock or futures is easier. weiwei

Interesting comments wei wei.

I've been talking to my options friend and he's making money doing his writing but he hasn't been doing it long. He get's like 9 winning positions in a row, but like you said, if you take a HUGE hit, it could wipe out gains significantly. So the key is, can they make enough money fast enough so a big hit doesn't take out 30% of their account in a single trade.

[ammo]

if your selling options as a naked position there is a lot of premium in them when volatility is high,and if you sold both calls and puts for a spread that will shrink with time ,and if you are always on top of the market so you can constantly adjust your position,they can be extremely profitable,if he's losing on a regular basis then he's probably trading more size than his knowledge of the markets can steer,like a bus versus a bicycle, you could advise him to sell calls against his puts when hes wrong or vice versa,and to trade smaller when he's cold ,sometimes you just don't see clearly and it's best not to trade when you are having those types of days

[bakrob99]

You could suggest to your friend to use a CONDOR as a safety net. Basically - if he is writing a CALL option, he can buy a (inexpensive) CALL option out of the money which will provide insurance on his trade to limit the risk to the difference between the 2 option strike prices. Also - he should put 10% of the premium he collects into a fund to pay for the inevitable loss which will occur on events like Sept 11 etc.

[darthtrader]

	Quote:	dalby
	i disagree with one thing as i said, i use naked puts in an INVESTMENT account, not a trading account

dalby thats a fantastic idea i have never thought about before. I will have to explore that in the future as far as accumulating stock.

I was actually messing around yesterday with the TOS paper trader selling naked calls on aapl. Thats the only time i could see actually selling naked calls with real money. The june 130s were at 1.90 last thursday, today they are at .05. They were still at a buck yesterday when aapl broke support. Has anyone ever looked for situations like that with liquid options? I assume dumb money retail gamblers were just gambling on options, it would seem in situations like that you could crowd the exit and sell naked calls.