Registered: May 2009
08-23-12 10:15 PM
<<< Just curious... how can you claim that selling naked options cannot "crash" an account...I've been doing this since 1990s and I can tell you the most lost was the result of selling naked puts/calls. Is there something different or special about your naked put selling strategy that insulates you from black swan etc. >>>
Iceman, I believe you accidentally took that one single sentence out of context of my post, which I reposted below.
I was NOT talking about selling naked puts or naked calls. It was actually a discussion about credit spreads.
If you read my response below AND the post from Danshirley to which I was responding, you will better understand the "context" of my statement.
That being Dan was responding to my "hypothetical" $100,000 account I set up for his credit spread strategy.
He accused me of setting up 5 spread examples in the hypothetical account, which "HE" said was designed to deliberately.... "crash the account", per the moves I made in potentially managing them during difficult times.
The quote of mine you are responding to, was merely me responding to Dan's accusation, telling him I did not make any moves that would crash an account.
Again, the discussion was about being invested in credit spreads. Not naked puts or naked calls. I believe a strategy of having 100% of ones cash invested in a credit spread strategy, can indeed cash an account. That hypothetical $100,000 account, can go to a "zero net worth" faster than most spread traders realize. WHY?
Because in the very reasonable example I used, of spreads with strikes from $30 - $70, with the 100,000 equally distributed, it would cost the investor ONE MILLION DOLLARS to buy them all, and he only had $100,000. Thus his only choice for "risk managment", was to close for a loss.
And if he waited until the stocks were at or below his lower strikes.... his account would be worth next to nothing, Wiped out.
(I used 5 stocks in my example. But it would make no difference if 25 stocks were used.)
If he instead closed with the stock right in the middle of his 2 strikes, the account would still lose MORE THAN half it's value. The full "context" of my response to Dan is below:
Quote from Put_Master:
I'm not making any moves that would crash an account.
All I did was set up a 5 stock, 5 gap spread portfolio, within a $100,000 account. I then asked you 2 simple questions which you refused to answer.
When you say your broker will NEVER take the stock, you are correct. Because he can't. You don't have the choice.
If your spread is violated by a few pennies, you seem to think your puny credit will cover it.
WRONG. Not even close.
Between your stock dropping, IV rising, and time decay being of no help to you, because of your several month long contracts, and your stock now trading ITM,..... your losses will be a lot more significant than you think.
In addition, the wider your strike gap, the less help it is when closing down a spread trade. And most of your gaps are 5 point gaps.
THe more narrow your strike gap, the less damage is done when closing for a loss.
Those deep OTM cushions you have, exist only in theory.
If you dare risk waiting for the stock to trade between your strikes, before closing the trade down, you are in for a nasty surprise.
Even closing down close to your strike will be hurt more than you know.
Because I'm not on nearly the amount of leverage you are on via my naked puts, i can afford to buy and hold, collect dividends, sell covered calls,... if the stocks are put to me. It's nice to have that choice.
You have no choice. You must close your spread or risk being wiped out.
I'm not saying no one should sell spreads. All I'm saying is, be aware of the risks. Given your inability to answer my 2 simple questions, you are someone not fully aware of the risks.
Perhaps now you are.