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Old 03-11-2007, 03:26 AM   #1

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Writing Naked Puts & Calls - Risks

Can someone explain to me the main risks in this stock option activity? I have a friend and this is all he does. Is it any more dangerous then shorting something in the stock market overnight on huge margin, and having it gap against you hard way beyond your stop in the morning?
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Old 03-11-2007, 03:48 AM   #2

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Re: Writing Naked Puts & Calls - Risks

in theory, unlimited risk and limited reward when you write naked options.

I used to do the same thing your friend does, but a coupe of close calls made me think twice. the risk involved for the reward is just not worth it.

Control the risk and the rewards take care of themselves.
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Old 03-11-2007, 04:05 AM   #3

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Re: Writing Naked Puts & Calls - Risks

actually, the risk is only technically unlimited when you write naked calls

the risk in writing naked puts is limited
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Old 03-11-2007, 04:12 AM   #4

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Re: Writing Naked Puts & Calls - Risks

Yes, I don't understand him though. THis firend of mine. He has these pretty big losses. Last year he was down $25,000.00, and now he's been doing this naked options writing. Is this a logical move from the stock market?

I like the guy and don't want to see him get killed in the market. Could he? Do you have any advice I can repeat to him? I want to see him succeed.

His father has a $3,000,000.00 trading account...and he's been taking big hits...his losses seem to be getting bigger...$40,000.00 loss alone on the big drop day in the dow recently.

I keep repeating to him that he should lower his risk unit and just see if he can make money with small risk and small gains. Then slowly move higher. He made like $300,000.00 in 1 yr back in the NASDAQ boom days... but I'm scared that walll street will take it ALL back.

These markets today are difficult to trade.
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Old 03-11-2007, 07:51 AM   #5

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Re: Writing Naked Puts & Calls - Risks

Quote:
Originally Posted by dalby »
actually, the risk is only technically unlimited when you write naked calls

the risk in writing naked puts is limited
dude, until you actually write naked options you don't know what one goes through mentally.

In essence naked writers are not concerned about the risks invovled.
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Old 03-11-2007, 07:55 AM   #6

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Re: Writing Naked Puts & Calls - Risks

Quote:
Originally Posted by The Bear »
Yes, I don't understand him though. THis firend of mine. He has these pretty big losses. Last year he was down $25,000.00, and now he's been doing this naked options writing. Is this a logical move from the stock market?

I like the guy and don't want to see him get killed in the market. Could he? Do you have any advice I can repeat to him? I want to see him succeed.

His father has a $3,000,000.00 trading account...and he's been taking big hits...his losses seem to be getting bigger...$40,000.00 loss alone on the big drop day in the dow recently.

I keep repeating to him that he should lower his risk unit and just see if he can make money with small risk and small gains. Then slowly move higher. He made like $300,000.00 in 1 yr back in the NASDAQ boom days... but I'm scared that walll street will take it ALL back.

These markets today are difficult to trade.
He'll either learn to stop doing what he's doing or he'll blow the account.

Its that simple.

Trading is a right of passage, just because your account is so big, does not mean you are capable of trading that amount of money.

I've been approached to manage money from a friend who has some solid connections in terms of network, in the millions, and I've still rejected his offer to manage money, we're talking maybe $10 million to start.

Its a totally different ball game when you have that much money.
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Old 03-11-2007, 02:33 PM   #7

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Re: Writing Naked Puts & Calls - Risks

d00d,

i have written naked PUTS. i would NEVER write naked calls

and as i said, the difference is that the risk is NOT unlimited in naked puts. basically, i write naked puts in my INVESTMENT account (not trading account) at a strike price where i would want to start accumulating the stock.

if i write naked puts with a 20 strike, and the stock is currently at 22, that means i would buy if i could get it at 22
a stock can only go to zero but it can go up (theoretically) infinitely.

so, naked calls DO have unlimited risk. naked puts do not.

it is incorrect to say that naked options in general have unlimited risk. that is only true of naked calls
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Old 03-11-2007, 03:21 PM   #8

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Re: Writing Naked Puts & Calls - Risks

Guys I know in theory they have unlimited risk (naked calls), but is there any more risk than trading highly leveraged commodities short and having them gap against you the next day?

Yes in theory it is unlimited risk, but who would let a position move against them that much. Isn't it usually possible to close out these options positions?
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