We just had a huge market sell off....bigger than 87 and comparable to 29. Writing naked options isn't going to be an ongoing thing. I mainly write them to generate income for my first trade. Right now I trade on 20k. Each year I start over and begin by writing naked way out of the money calls or puts. When I generate $1000-$2000 of income I'm ready for my first trade. I use this for my stop. If I get wiped out on the first trade of the 1-2k I have to start over. If I profit from the first trade I can move on to a second trade and so on. Only building on my profit and never risking my capital. Does that make any sense.
I had a really awesome, detailed description of a scenario where one could easily lose several times their stop-loss on a naked options position, but somehow, it didn't get saved. I'm not going to go through typing it all over again. Suffice it to say, you and only you can decide how much of your account you are willing to risk on a single trade. Nobody will be sitting there holding your hand while your knuckles turn white from gripping your mouse, wondering whether to send out an order to cover a position gone bad. As several people have pointed out on this thread, you could easily lose more than you bargain for on a naked short option position. As long as you are aware that the possibility exists to lose 2, 3, 4 times your mental stop, or more, and you will still have capital with which to trade the next day, then go for it. You probably DO have more chance of getting hit by a car than having THIS ONE SINGLE position blow up. If selling naked options is a long-term gig for you, then I'd bet on a position blowing up on you eventually. So trade small with naked options. Trade really small. Enough said, as people have indicated, stop-losses really do suck for anything as thinly traded as options. If you could place a hard stop for your option trade, then I have no doubt in the near future we'd be reading a new thread in the "Order Execution" forum entitled "WTF Happened to my option stop order?". Good luck!
my7tvette has it right. Yes, you can do this, but you need to stay pretty small. What we saw in 2008 was nothing compared to 1987. The market moved 5-6% on some days in 08, but moved 22% in a couple of hours in 87. It's not the same kind of crash. And the volatility spiked horribly. This is one of the problems with starting way out of the money. The volatility effect worsens as your trade gets out of hand.
Selling well out of the money puts and calls is called a strangle. The strangle has this nomenclature because that is what happens to you when you are wrong. Short strangles by their nature lead to a bad combination of small profits and large losses over time. You don't get pleasant suprises when you short strangles. By being short both a put and a call you are open to losing money on a big move up or down. Then there are the times when the market moves big one way and then the other way making you a 2 time loser. A heck of a lot can happen in 3 months. Volatility can change quite quickly. You never know when the fat tail is going to do you in.
You're confusing size with speed. It's not big moves in and of themselves that kill someone holding a short straddle (or any other uncovered option position). It's big, FAST moves where you can't get out of your position. '08/09 was big, but it wasn't even close to being fast. '87 and '29 were fast (for the time) and big. The thing is, we got a taste of what the new fast move will look like on 9/11. It wasn't a big one, but it illustrates how the markets can now behave - instant moves. If you don't think big and fast will meet up again one day, you've got your head in the sand. If we assume an efficient market for math purposes for a second, we can figure some things out. You have a $20,000 account. You are taking on overnight/weekend risk that the market prices at $200ish. So that means the market expects you to get your entire account trashed roughly 1 trade in 100. Of course, those numbers aren't exact because the market tends to pay a overly large premium for you to assume open ended risk. So maybe more like one trade in 200 you'll blow out your account. And of course, since it's open ended risk, your pain doesn't stop at $20,000. It stops when the market firms up, which may be long after your life is ruined. You simply don't understand what you're fucking with here. Seriously, stop.
:eek: 1995, Nik sold OTM Puts and calls, Nikkei dumped, volatility rocketed.. the Puts got creamed .. and so did the Calls with the voaltility spike. stick 90% Imp Vol into your Option model, and relish the margin call :eek:
I'd try to reply with a good explanation of the risk involved but so many others have done such a good job already. So I'm just going to echo the Big D's concise summary
You're assuming that the market makers are still there to trade. In '87 the MM's were pretty much nowhere to be seen. B/A spreads were Holland Tunnel wide. IV rocketed through the roof. I simply loved the margin calls The day before the Monday crash was October expiration. I ate the menu on EVERY OTM naked put that I sold or rolled to on that Friday. Instead of selling the OTM strangle, the OP might consider selling 2-4 times as many verticals. A crash will sting but every long leg will offset the IV explosion and would enable riding it out.
You can enter a stop loss on your trade, if you can't get another broker. Tell him to "buy 10 calls, xyz feb 100 calls at $1, to close, good til cancelled". They might only take day orders. Now, you risk getting gapped through and then your limit order becomes a market order, and you will pay bent over style. As for your correlation trade, gold vs. dollar, interesting. However the pittance you bring in on one side OTM premium won't make up for the unlimited potential for loss on the other. Could gold gap $500?? The gold bugs around sure would think so LOL.