put/call selling seem to make sense so far as of now.

Discussion in 'Options' started by noob_trad3r, Aug 18, 2010.

  1. IF this market continues this up/down sideways it seems the only way to grow your nest egg for now is selling ATM or slightly OTM short puts to buy stock, short calls to set up limit sells.

    And at least grow your portfolio.
  2. ptrjon


    it's always a great time to sell options- until it isn't. That's when you lose your shirt. I like selling options, but you always have to be careful, and aware of your leverage.
  3. It's the ONLY way?
  4. how do you lose your shirt?
  5. Why not, I am not a day trader. why not get compensated for taking the risk of buying stock or holding stock?

    instead of just having a 401K in some mutual fund going no where, and management fees eating out your nestegg even though the market is flat after all these up and down BS?

    At least with options you can get compensated for all this foolish market up today for 2 days, down the next 3 etc..
  6. ptrjon


    Perhaps you can teach me?
  7. I agree. I use my swing trading template for this market. A quick three to five day trade and the probabilities of sucess are only with options ITM.
  8. A few simple ways of losing your shirt. This being options, you could probably invent some very advanced ways of winding up busted & disgusted:

    1. Selling naked options. Good way to actually be naked, homeless, etc.

    2. Selling too aggressively way OTM options in a condor, and then freezing like a deer in the headlights when one of the legs start deteriorating rapidly and you can't bring yourself to close the position and limit your losses because you went for a year, or two or three, calmly collecting the premium without incident, and you really don't know what to do when suddenly you might actually have to trade your way out of trouble.

    3. Thinking, re number 2, that "adjustments", the most common of which is selling some more on the side that's not deteriorating, will keep you from losing said shirt. Generally speaking, the sales won't bring in nearly enough to keep your shirt on your back if things continue to get materially worse. Even worse, the market could reverse, and you wind up now losing on the side you thought you'd just collect some more premium on, and so you freeze like a deer in the headlights anyway.

    Selling options is extremely dangerous, no matter what. If you see a minus sign in the gamma column, be afraid, and be ready to ruthlessly limit your losses when things start going against you. You have to have a trading plan ahead of time for when things go too far against you. You should also have calculated ahead of time the theoretical max profit, theoretical ROI (based on margin needed to hold the position, NOT on the value of the options in the sale/spread), theoretical max loss, and max loss you are willing to take before you get out.
    Back testing against the fall of 2008 is probably a good idea. Also against the spring of 2009, when sold calls would have got you into deep trouble, rather than the more usual and more usually hedged-against sold puts. The market can be irrational in both directions. Don't believe what you see in the skew. The skew is just a measure of fear, and is therefore irrational. Just because someone else got bit in the ass by puts doesn't mean you won't get bit hard from the call side.

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  10. I agree that you can and will loose your shirt if you don't have the knowledge, discipline, training and skill. You sound like you are an experienced trader, you should know about applying strict risk management rules. You should not have to loose your shirt.
    #10     Aug 18, 2010