Any option writers out there?

[DTM]

I agree with you that the premium you receive is the same but as you stated the risk graph is different. The only scary part of a covered call is the share price dropping, but thats a risk everyone takes. With naked calls or puts, when the price spikes, it is much harder to get out of your position in options than it is with shares. With shares you can get out straight away. A good example would be AMC which dropped 45 cents overnight from a closing of 7.55 and re-opening of 7.10 the next morning on 7 Dec '04. The options markets don't really open until 11 am so you would have to watch as your losses built up. Even when the options market dp open, it would be harder to get out because options become very expensive with price spikes (so your losses would be greater with naked calls or puts than if you only had the shares) and also the problem of liquidity. With shares you can get out any time without attracting a premium price as options tend to do.


Anyway, I suppose it comes down to what you're comfortable with. I still disagree that naked Puts are the same as covered calls just because they have the same payout. The big difference to me is the difference in the risk graphs.

If you're doing covered calls and you're comfortable selling naked calls and puts, then I don't see any reason why you wouldn't sell naked Puts with a covered call, thereby maximising your profit.

 

[wayneL]

<<Anyway, I suppose it comes down to what you're comfortable with. I still disagree that naked Puts are the same as covered calls just because they have the same payout. The big difference to me is the difference in the risk graphs.>>

Huh??

So you, with less than one years experience, disagree with Charles Cottle who has been an options market maker for 30 odd years? LOL

Try as I may I can't make the risk graph of a covered call look any different to a naked put.

Did the clowns at optionetics teach you some esoteric technique the rest of the world...Charles Cottle included...doesn't know?

 

[DTM]

Maybe its from being a beginner or from what I've seen in the market place but I still wouldn't write an option unless I was 100% sure which way it was headed. Even then, if you're so sure about the direction, the decision is always best taken with a grain of salt.

I don't quite agree that the risk graphs look the same. Take ION for example (if it had options), if you had two positions on it, one a covered write and the other shorting puts, and on the day of the annoucement that ION went into Administration/Liquidation and the shares were suspended on the ASX, the covered call's loss would only be limited to the price of the share therefore leaving the premium still in hand. With shorting puts, your loss is not limited, ie, you may end up paying for the loss of share value. Therefore the covered call graph would look more like a bull call spread.

The other reason I won't write options is that I work from a relatively small base of funds and can't afford to get exercised. My trading strategy is to take opportunities when they arise not to wait for the option to expire.

I am still learning and I did find optionetics helpful as the more I go back and re-read the materials, I pick up things I missed before. The key for me was learning how to interpret market signals for myself. Trading options and shares for me has been a life changing experience as it allows me to (1) make more money in two months than I would in a year ( I quit my job as an accountant), and (2), allow me to spend more time with my family then I would ever imagine possible.

I'm still a beginner and am on a huge learning curve. Every point of view is invaluable to me and am happy to learn more.

 

[positivecashflow]

Therefore the covered call graph would look more like a bull call spread

Hi DTM,

Check out the graph on Page 4-45 of the From Practice to Profits book (book 4), it looks nowhere near like the graph on Page 4-51 ...

Just remember if you write an option, that you must cover yourself by either buying an option with a strike price above it, below it or to the side of it...

Did the clowns at optionetics teach you some esoteric technique the rest of the world...Charles Cottle included...doesn't know?

No they didn't...

Cheers,

J.

 

[wayneL]

Maybe its from being a beginner or from what I've seen in the market place but I still wouldn't write an option unless I was 100% sure which way it was headed. Even then, if you're so sure about the direction, the decision is always best taken with a grain of salt.

I don't quite agree that the risk graphs look the same. Take ION for example (if it had options), if you had two positions on it, one a covered write and the other shorting puts, and on the day of the annoucement that ION went into Administration/Liquidation and the shares were suspended on the ASX, the covered call's loss would only be limited to the price of the share therefore leaving the premium still in hand. With shorting puts, your loss is not limited, ie, you may end up paying for the loss of share value. Therefore the covered call graph would look more like a bull call spread.

The other reason I won't write options is that I work from a relatively small base of funds and can't afford to get exercised. My trading strategy is to take opportunities when they arise not to wait for the option to expire.

I am still learning and I did find optionetics helpful as the more I go back and re-read the materials, I pick up things I missed before. The key for me was learning how to interpret market signals for myself. Trading options and shares for me has been a life changing experience as it allows me to (1) make more money in two months than I would in a year ( I quit my job as an accountant), and (2), allow me to spend more time with my family then I would ever imagine possible.

I'm still a beginner and am on a huge learning curve. Every point of view is invaluable to me and am happy to learn more.

OK DTM lets work through this:

I don't have ASX data so don't know ION's price at delisting etc. But lets create a hypothetical situation.

Lets say we have a stock trading @ $15 with option IV's @ 50%

Scenario 1:
Purchase 1000 stock @ $15 = spend $15,000
Write 10 contracts Jan $15 calls(or 1 contract if in aussie) = collect $750 - $800 premium

Scenario 2;
Write 10 contracts Jan $15 puts = collect $750 - $800 premium

Next day stock delists and is wound up.

Scenario 1
Lose investment in stock position = -$15,000
Keep call premium = +$750 - $800
Total loss = ~$14,225

Scenario 2
Have worthless stock put to you @$15 = -$15,000
Keep put premium = +$750 - $800
Total loss = ~$14,225

!!!!So what's the difference??????!!!!!

 

[DTM]

Yes. Good point. No difference really. I was thinking of the cash left in your hands if share was delisted. I see now the difference is that with a covered call you're paying for your loss before hand whilst naked puts just means you pay for it afterwards.

Thanks for setting me straight. A mental block has just been lifted!

 

[crashy]

DTM



My best advise to you is to cease trading until you can successfully tell your arse from your elbow (no offence). You are playing a very dangerous game against guys who are very experienced and ruthless. Do you really believe you can take their money while they are scheming to take it from you?

They just love it when inexperienced option traders show up in the market after doing a course or reading a book promising a lot of easy money but holding back the truth. A steady supply of newbie option traders for me to take money from is what I seek as an option writer.

Either you skimmed through the material or this optionetics crowd is just telling you what you want to hear (and only half the story).

You seem to be overly confident yet disturbingly inexperienced, a dangerous combination. Beginners luck runs out fast in this game.

Quit while you are ahead. Come back to the market when you can debate the pros and cons of say 50 different strategies.

 

[DTM]

Hmm.... Sobering thought. Even though I'm not aware of all the strategies, the one that suits me is just buying and selling ITM options which is relatively safe and success is only dependent on being able to predict price movement. I realise that if I'm aware of all the other strategies I may be able to fix some of my failed trades. I will eventually learn more strategies as I go but my system is relatively simple and suits me.

Thanks for the advice and I will be careful.

 

[obiwan]

writing naked calls is risky, the risk is potentially unlimited. With volatility trending lower this year, option writers may take a bath when it spikes.

 

[wayneL]

writing naked calls is risky, the risk is potentially unlimited. With volatility trending lower this year, option writers may take a bath when it spikes.

Obi,

The assertion that naked puts have unlimited risk is not quite correct.

The downside risk is ultimately limited by the the underlying going to zero. It can go no further.

Therefore the risk of naked puts, though high, is quantifyable and not unlimited.

In fact, as Crashy has pointed out the actual dollar risk is less than the equivelent underlying position, due to recieving the put premium...as illustrated in the scenario above.

I also suspect option writers will be looking forward to a spike in volatilities as this will enhance the risk/reward of short option positions

Naked calls?...Now thats different!!!!

 

[positivecashflow]

Even though I'm not aware of all the strategies, the one that suits me is just buying and selling ITM options which is relatively safe and success is only dependent on being able to predict price movement.

DTM,

Are you trading debit spreads or credit spreads? Are the options ITM close to expiry or > 30 days to expiry? Are they deep ITM or just slightly?

 

[DTM]

Hi PC

I mostly buy ITM options and within the 30 day expiry. Currently most of my purchases have been calls (reflecting the bull market).

I am currently have two call spreads on at the moment, two on RIN and one on BHP. I'm putting the spread on not in the hope that the price goes up but that the price goes down.

I will quickly explain my reasoning and won't try to bore you too much.

B 10 X 9.00 March '05 calls
S 20 X 9.75 March '05 calls

B 10 X 10. March '05 calls
S 20 X 10.50 March '05 calls

When I put the spreads on I received a good credit for the spreads. Currently I am behind by 7K, ie the value of the short calls are higher than the value of the longs calls.

My reasoning for putting the spreads on is that I am hoping that the price will drop whereby I can purchase back the short positions for a much less price than what I received from the sale.

I normally wouldn't do spreads because the Margin required ties up too much capital which could be better utilised in making money. The reason I did put a spread on is that in my opinion (looking at the RIN chart), I think there will be a major correction in January. Looking at the XAO, that also looks like its heading for a major correction.

What if I'm wrong? If the price keeps going up then I will roll my spreads into the next quarter but at a higher strike price, eg sell the March 9.00 call and buy the 9.75 June call. Buy back the 20 X 9.75 March call and sell 20X 10.50 June call (as an example). I would roll the spread over for the minimum amount of debit or if I can, I will try and get a credit for it.

If I'm right, and the price drops down to around $10, then I would purchase all my short options at a much cheaper price but still be deep ITM with my long positions. I wouldn't let any short position stay open as I prefer to get out ASAP, even at a cost. The only time I would let it expire if it was two weeks out or something like that.

Hope this helps.

 

[positivecashflow]

Hi DTM,

Thanks for sharing. I hope you understand the risks you're taking in your chosen strategy. Good luck.

 

[Oob]

Etrade does allow online option trading, but only on stocks with high liquidity. I think about 80 ASX listings, with high volume, like Telstra, NAB etc.

They have some special rules about covered calls, like they impound the underlying stock so they can access them if you are exercised.

 

[SuperTed]

From the Etrade website:

What collateral is required by E*TRADE to write a Put?

50% cash cover of the total exposure of the position is required by E*TRADE to write a put. 50% cash cover is calculated as being the number of contracts being written, multiplied by the shares per contract, multiplied by the strike price (exercise price) of the option series, multiplied by 0.5.


Does E*TRADE offer the writing of naked ETOs?

Not at this time.


What collateral is required by E*TRADE to write a Call?

A written (sold) call must be fully covered (stock specific) by the underlying shares of the ETO.
_______________________________________________________________

I dont think any fulltime traders would even consider etrade. I have had my account for 4 yrs and never used it

 

[markrmau]

SuperTed, who do you use for brokerage?

Also, I get the feeling that if you want to trade options, you should go to the us market for higher liquidity and lower spreads. Is this correct, or is there money to be made in Aus?

Thanks, Mark.

 

[SuperTed]

There is still money to be made here, even though it can be a stuff around at times. Trading in Australian waking hours seems one advantage to keep trading here (just a thought).

WayneL is the person to talk to about trading US.

I use Tolhurst. Of the big firms Commsec overs the best margin requirements for writing naked (1.5x OCH margins). I used to be with TDwaterhouse (20% cash cover).

Etrade, Sanford are still dreaming that they offer the best service to option traders.

 

[GlobalIndexTrader]

I have been writing options against Indexes for several years. The main ones I trade is the Dax and the Stoxx as they are European style cash settled markets which means you can only be exercised on the day of expiry. I sell naked calls all the time. When writing puts though i will always do it with some sort of insurance. As I sell time decay the calls are never a problem as the market slowly moves upwards, its when the market drops is when you can get unstuck hence why I buy insurance to cover my risk. As far as brokerage goes the option only has to move 3 points to cover expenses, the rest is profit.

 

[wayneL]

Hi Global,

Any reason why you don't trade some of the other spreads, depending on IV's and your view of market direction.

For instance, if IV is very low you can use verticals or backspreads to crank up returns and reduce risk.

Cheers

 

[GlobalIndexTrader]

I have used other styles more recently (calender spreads, butterfly) as the volatility has been very low. in fact only in the last few weeks has the settlement values increased enough over my time period to warrant entering the market at all. Since I dont directional trade I mainly only sell calls after a few up days and sell puts after a few down days. This seems to keep me far enough away from the market so that I can stay in long enough to exit giving me a greater annualised percentage than if i would have stay in until expiry.

Hi Global,

Any reason why you don't trade some of the other spreads, depending on IV's and your view of market direction.

For instance, if IV is very low you can use verticals or backspreads to crank up returns and reduce risk.

Cheers