If they were highly leveraged, I think they might even have a problem entering orders into their brokerage platform to get out of the losing trade if IVs really exploded, as they'd have tied up all their margins I expect. As the markets are tanking, they start to panic and try to get their brokers on the line to help them close out the positions as the markets go down with every tick.... Scary!
I'm assuming you've done this before, do you mind sharing on the following? What happens when the underlying hits your futures trigger point early on in the trade (i.e. your put has 25 days left), and the puts you sold still has a lot of time value left in it? Will you close out the position once your futures get triggered, or do you hold it till expiry? If you take the loss, how many months premiums has that cost you? I'm assuming it'd have cost you a lot, and IVs would have gone way up if that happens. If you hold, what do you do if the underlying price whipsaws around your trigger price? How many ticks up will you plan to buy back your futures? Thanks.
A lil' reminder of what happened in January to many put writers that thought they could simply 'trade around' any type of gap situation.
I would never tell an unskilled learning trader to sell naked puts, end of discussion. Also as I said a naked put is not an equivalent to a logn call so the comparison is apples to oranges.
This is really bad. A monthly return of negative 24.28% can easily translated to a maximum draw-down of almost 50% in January 2008. :eek: IMHO: The Annual Max. Draw-down reported by this fund may be misleading. "Biggest negative monthly return for that particular year" may be a better term. I ***GUESS*** the peak-to-trough draw-down of the fund in 2007 could easily be larger than 25%.
You wrote "unkilled trader" instead of "unskilled trader." I like it your way better. If I were counseling an "unkilled trader" who wanted to remain unkilled, I would never counsel him to do any of the above in the random manner suggested. Buying options because it's Monday is not a strategy. Selling options because it's Monday is not a strategy. It's like closing your eyes, rolling the dice, and asking which number a skilled trader would bet on. What you're talking about is gambling, not trading. Paying attention to what's going on around you, noticing when extreme emotion pushes something out of line, making a play betting that will be temporary - that's trading. Emotion is contagious, so it will be emotionally difficult to fade the crowd. The more emotionally difficult - then probably the better the trade. To me the essential ability of a trader is to somehow locate the tiny voice of reason being drowned out by the ocean of emotion making you panic along with the herd - and ignore the ocean and the panic, and follow the tiny voice. Not easy.
I think your point is that it is less risky to sell consecutive monthly puts just OTM, provided you are not using any margin, and cash can back up your assignment if needed. I actually cannot think of a more conservative option play over the long run. I have to stress though the trade must be backed by cash to cover the assignment. If they go ITM at expiry, they're bought backed and rolled over. Another similar strategy would be buy a 6 month 5% ITM call, and fund the purchase with selling consecutive monthly 2% OTM calls. As far as #1 goes: My guess is you would be far worse off buying otm calls and rolling them over every month.
You don't HAVE to be highly leveraged with options. And rolling over to the next month has nothing to do with Martingale. It is a consecutive capture of ~3% of the stock price every month REGARDLESS of where it is trading. There is no double-down. And the problem with BUYING options is the person thinks they are super genius when they win. Genius can fail not just sellers. The danger of the game people is fucking leverage. It ain't buyin nor sellin. It's LEVERAGE. Examine a couple blow-ups from the top of my head right now: LTCM Neiderhoffer BSC Amaranth If anyone can add some more lets's hear 'em. The killer you find throughout all is going to be leverage though. Again, the act of buying an option is no less risky than selling an option. The r/r profile is different. Find your edge, then use an option trade to facilitate it, be it buying or selling. They are just tools, NOT STRATEGIES IN THEMSELVES.