Sticking with Calls and Puts

[warezwana]

And whoever sells naked options without UNDERSTANDING 100% the risks, well, they deserve to be creamed.

To sell a 'naked call'.. that means instead of buying a call option you 'sell to open' right?

 

[wayneL]

To sell a 'naked call'.. that means instead of buying a call option you 'sell to open' right?

Yes

. And whoever sells naked options without UNDERSTANDING 100% the risks, well, they deserve to be creamed.

Like that one guy in "Market Wizards" who was making heaps of cash selling naked calls and then, in one terrible day there was a takeover announcement and EVERYBODY exercised their calls, even thought they were out of the money. He lost over 700,000 or something.

Amen.

Naked puts has been a point I covered at some length on my blog last week.

There is unnecessary fear and loathing of naked puts. So many buy/write traders regard them as the spawn of Satan. Go figure.

The main risk is not being naked a call or naked a put at all. There is in fact less risk than being short or long stock in equal numbers because of the premium collected. (We're talk pure risk here, nor risk reward).

The risk is LEVERAGE.

Sell one put contract of BHP and you are effectively long 1000 of that stock at the strike price. The question one should ask oneself - "Would I be comfortable buying 1000 BHP?".

Now some will go ahead and sell many OTM puts to collect premium, exposing them to being long many thousands of stock... LEVERAGE.

Same with naked calls. You're effectively shorting the stock.

Look. Every stock trader has been caught up in a nasty gap. It happens, It sucks. But it's not generally account ruining unless they're leveraged up via CFDs or whatever. Most stock traders understand their risk.

Most option traders don't understand their risk. Most "educators" don't even cover money management and position sizing. I imagine the lesson Emil might have learned was that he was trading too much size. To me that's obvious.

Of course there are better strategies if you're just trading vega/theta. With naked calls and naked puts, you have to be prepared or even perhaps desire to be short or long the stock.

I used naked puts during that remarkable volatility to get me into some banking stocks, then sold calls to keep lowering the cost base. As a result I now have some stocks with a cost base of less than zero. But the important thing to note is that I wanted the stock, if I didn't get it because I wasn't assigned, I made very nice profit. The perfect strategy for that situation.

But do I trawl around looking for high vols to sell puts on (like the CC traders do)? No #~~#ing way, Jose!

Commodities are a different deal, I sell naked puts and calls all the time, just to collect the premium... but under very tight statistical criteria. (As described by Stuie Johnson in his book "Trading Options To Win") This is the so-called "non-seasonal" trade. But I also have a defence regime in place - "Apocalypse Never" as Stuie so amusingly puts it. You have to know when and how to start adjusting or morphing, and when to just get the hell out of Dodge City (to use another of his phrases).

I posted a trade a few months ago selling naked calls on the SP 500 using this method.

The secret is not only knowing the risks and rewards, it is knowing probabilities as well.

Blog articles> Naked Puts - Myths and Truths = Naked Puts - An Addendum = Naked Puts - A Horror Story = And a little bit about blowing yourself up =

 

[mkelpie]

Some good, and very pertinent info to what I'm doing at the moment, which is writing puts, specifically on BHP at a price I'd be happy to buy at. The one thing I'm doing that keeps me edgy is that I've got more contracts open than I could buy in one time if exercised, but obviously I don’t open them all at same price so if I had to buy a few of them back, one or two of them would be significantly cheaper price than I sold for.

 

[cutz]

The one thing I'm doing that keeps me edgy is that I've got more contracts open than I could buy in one time if exercised,

Ouch,

That could hurt big time if the market cops a pounding, be careful out there.

 

[mkelpie]

Ouch,

That could hurt big time if the market cops a pounding, be careful out there.

I'm happy to accept a lower premium while writing puts with lower strike prices, so I've got a bit more time to be reactive. Must admit tho I was happier doing this while BHP was mid 30s than kissing 40.

 

[cutz]

I'm happy to accept a lower premium while writing puts with lower strike prices, so I've got a bit more time to be reactive. Must admit tho I was happier doing this while BHP was mid 30s than kissing 40.

What strikes are you looking at ?

The problem with this concept is you're taking on to much risk for what you stand to gain.

Nov 36 puts last traded at 26 cents, take on too many and your position potentially can blow out before you have any chance of making good, especially if IV explodes.

 

[cutz]

Actually just realized wayneL has gone through this already (post #42).

So I guess who am I to tell you how to trade mkelpie but IMO naked puts more than you can handle if assigned just aren't worth it, especially now.

 

[condog]

Hi Great thread - luving it...

Wayne , can you give examples of the strategies you used to g lower your cost base.....to below zero


I understand how to write a call option and lower the cost base of a stock...

But how did you manage to lower the cost base to below zero... where you in and out of the stock multiple times....

or Did you just write call options for lower and lower prices and where lucky enough to stay out of the money all the way down , making enough premiums for writing that it offset the eventual buy price.

Also who you trading through and whats the cost... I'm using comsec, but its a bit expensive for my liking...

 

[wayneL]

Hi Great thread - luving it...

Wayne , can you give examples of the strategies you used to g lower your cost base.....to below zero


I understand how to write a call option and lower the cost base of a stock...

But how did you manage to lower the cost base to below zero... where you in and out of the stock multiple times....

or Did you just write call options for lower and lower prices and where lucky enough to stay out of the money all the way down , making enough premiums for writing that it offset the eventual buy price.

Also who you trading through and whats the cost... I'm using comsec, but its a bit expensive for my liking...

Naked puts and CCs when IVs when outrageous. Then collaring and synthetic backspreading.

Believe me, it was more @rse than class. The stock I have below cost is C. This is fortuitous because it's crap. But I also have some HBC, BAC and STD at low cost bases, which I'm more happy with....

...at the moment.

 

[cutz]

Also who you trading through and whats the cost... I'm using comsec, but its a bit expensive for my liking...

Be careful with comsec, especially with assignments and adjustments.

Received a surprise today when i discovered one of my nice little backspreads copped an early on the short side, 0.35% brokerage is a bit of a party pooper.

 

[sails]

Be careful with comsec, especially with assignments and adjustments.

Received a surprise today when i discovered one of my nice little backspreads copped an early on the short side, 0.35% brokerage is a bit of a party pooper.

Sorry to hear that, Cutz. It's highway robbery, IMO.

I find the worst thing with outrageous brokerage like that is that you have to try to avoid assignment as much as possible. It's complex enough just trading options without having the distraction of trying to avoid assignment.

And one of the worst things is you can be assigned as the market is just about to turn. I have sometimes seen excessive option exercises occour prior to market turns. Eg - large no. of put exercises can be bullish - but definitely not guaranteed - lol!

 

[cutz]

Hi Sails,

Yeah,

I avoid assignment in my comsec account like the plague, i've managed to keep it down to 1 per year for the last couple of years, better off taking a loss sometimes.

 

[freebird54]

I have been with interactive brokers a couple of months - great for share trading and just started with options with them -fast fills and at $3/a time compare with Commsec [who, BTW, are already 2 days late settling on a trade and blaming the melbourne cup as they say no settlements happened country wide because there was a public holiday in Melbourne and all their systems are linked!!!]

 

[condog]

I avoid assignment in my comsec account like the plague, i've managed to keep it down to 1 per year for the last couple of years, better off taking a loss sometimes.

Thanks all

Whats your strategy to such low assignment??

And what sorts of positions are you taking to achieve this...

 

[cutz]

Thanks all

Whats your strategy to such low assignment??

And what sorts of positions are you taking to achieve this...

Hi condog,

I keep comsec assignments down by doing most of my serious trading through IB.

Comsec is pretty much my covered shallow call backspread account.

 

[freebird54]

I have done some nice trades lately - covered calls and the occasional put on stock I am happy to buy.

But I am trading a lot more frequently o up days calls and down days puts.

More than $1000 profit on BHP calls and STO puts this week

Is there a site that gives % return over the number of weeks to expiry?


I know the AFR publishes them for % return/annum but too late and not always accurate?

On the enclosed watchlist I need to setup an extra column with a formula that automatically calculates the % return on an option

This I have to change many times a day of course

So any excel experts?

The calculation will be h2 etc. [Last trade in red ] divided by strike/exercise price e2 x 100 to give a percentage then divided by 52 to give a weekly figure then x number of weeks to expiry date d2 from this week so = 8 weeks to 24/6 expiry info below from westpac watchlist today


Name Code Call/Put Expiry Date Exercise Price Bid Offer Last Change ($) Change (%) Last Trade Time High Low Volume Open Interest Contract Size % return per week
options BHPGS8 Call 24/06/2010 43 0.92 0.98 0.95 -0.42 0 2:10 PM 0.97 0.94 39 1023 1000

 

[freebird54]

If you search for my other posts you will see In started with just calls/puts and did wel - exercised a few times of course
Am now doing mainly covered calls with only 3 losses out of 26 this fy

for last few weeks have been doing vmore complicated spreads/condors etc. with reasonable success

I am just wondering for the Option junkies here, if it is possible to make it in the world of Options sticking to Calls and Puts?
Nothing more, no spreads just basic Calls/Puts....

No myths, just facts... if anyone has done it, does it


The reason im asking is my wife and I as total newb's started virtual trading in January... Before the 1st week of January I knew NOTHING and I mean nothing... (well I knew a Call meant up - Put meant down) after attending an Optionetics introduction seminar, you know the free 2 hour flash n dash sales pitch.

Late in Dec I was virtual trading 'stock' (but trying to trade Options, i just couldnt understand about the option coding vs stock ticker) using OX virtual platform...
1st week of Jan saw me figure out how to buy/sell options...
....Time to reset my virtual account...

2nd week saw some wins but mostly losses (still didnt figure out that the results were delayed from when i hit sell and the $100 or so profit I was expecting kept turning to losses)
2nd-7th week saw a total of 56 closed trades (and YES I still have the saved 'Account Activity') maybe 10-15 more trades still on the board but possibly losers, I cant remember but they were NOT CLOSED.

My account started at $5000 but I borrowed more and more as time went so I could keep placing new trades and not have to wait till I closed the positions. I think at the most i'd borrowed 25k.. at the 7th week I had profits of $11'700US

Now my wife posted similar results.. I think from memory she placed around 35 closing trades and in those 5 weeks or so had pushed her account to just under $7000US profit.

We both have our saved Activity and like I said they clearly show winners and losers. What I don't get is how can this be beginners luck.. I have tried finding a way that will show me that between us we posted 80-90 closed trades and the $18'000 or so profit is all just begginers luck! But I just cant find the logical explanation that says 'yeah, begginers luck'

I cant help but think how it could have been had we let the winners run with trailing stops and cut our losses off sooner as we didnt know about stop losses or trailing stops... All we did was 'buy/sell'...

I'd really be interested if I can get some experienced answers?
Glad to post our Activity list if its just too unbelievable.... tell me or prove to me it's begginers luck, cos its killing me

p.s the trades were all placed and closed between 05 Jan 09 - 10 Feb 09

 

[freebird54]

If you search for my other posts you will see In started with just calls/puts and did wel - exercised a few times of course
Am now doing mainly covered calls with only 3 losses out of 26 this fy

for last few weeks have been doing vmore complicated spreads/condors etc. with reasonable success

just an update - just stick to the basic selling cash covered puts and stock covered calls

 

[cutz]

Anyone still trading ASX calls and puts ?

Seems like retail trading volumes have backed right off. especially on the equity series.

What's going on ??