How to manage open-ended risks like selling options?

Discussion in 'Risk Management' started by helpme_please, Jan 1, 2020.

  1. Yeah but that still does not address the risks accurately to newbies. to say the naked put is technically less risk than owning stock outright is winning on a technicality. However getting wiped out is getting wiped.out regardless of your loss.was reduced by $2.00/ share.
     
    #31     Jan 2, 2020
    zdreg likes this.
  2. ET180

    ET180

    Newbies should not be buying stocks that stand a significant risk of complete wipeout. At least not to the level that they become a significant holding. If they limit themselves to major index and sector ETFs (non-leveraged) then they should not be worried about a complete loss.
     
    #32     Jan 2, 2020
    Stamamarti likes this.
  3. What they should not be doing and what they end up doing are often 2 different things... that is why they are newbies :)
     
    #33     Jan 3, 2020
  4. Tomaz26

    Tomaz26

    I think you misunderstood Wheezooo. You are not comparing same things here. If you sell 1 ATM option sure your risk is lower, because you only own half the deltas.. It would be comparable only if you sold 2 x ATM option. Then you can compare 100 to 100 of deltas.. And yes, even 2x ATM can be lower risk. There is a strategy that does just that on SP500. Instead of owning SP500, one sells 2x ATM monthly each month. This strategy underperforms in big bull market, but outperforms in bear market. You can view it as lower volatility or smoothed returns in a big enough cycle.. But anyway you for sure cannot compare selling 1 x ATM to being long underlaying.. This way you severely underperform during bull, but yeah, you do outperform in bear market, but instead you could also just go long underlaying with 50 % of money and put the other 50 % in low yielding asset and voila, same thing..
     
    #34     Jan 4, 2020
    Wheezooo likes this.
  5. ET180

    ET180

    It's flawed to analyze risk based only on deltas. Because if I sell an ATM put and an ATM call, I have zero deltas (roughly +50 from the put and -50 from the call) and if one only considers delta that would imply no risk. But obviously delta-neutral strategies contain risk. That premium does not come for free.

    Also, in many cases the shorting an ATM put will provide a better total return until expiration than buying 100 shares of the underlying...depends on what happens. In a strong bull market, long shares or long calls should offer better performance. Volatility typically also drops in a strong bull which will reduce the premium collected further lowering the benefit of put selling.
     
    #35     Jan 4, 2020
  6. ironchef

    ironchef

    What killed most retails writing calls & puts is we generally do it naked and on margin to juice returns.
     
    #36     Jan 8, 2020
    ET180 likes this.
  7. True
     
    #37     Jan 8, 2020
  8. horizon

    horizon

    Is the option selling strategy not working for you? I had to roll and end up give up the rolling in the middle of the road so lost money. The strategy so far is working but i did not follow it all the way.
     
    #38     Apr 25, 2020
  9. ironchef

    ironchef

    Hindsight is always 20/20.

    This, mostly true for the past decade:
    This year, not so much.
     
    #39     Apr 26, 2020
    horizon likes this.