Again if you read his post, his aim is to collect premiums without getting assigned. The covering is only happening when there is an imminent danger of getting assigned so it's not really a short put but a conditional short put conditional upon the fact that there is a change in market condition. If there is no change in market condition that it remains bearish, then there is no need to cover and he would be collecting the full premium. But the risk is just like what he wrote 1) he won't be able to do it JIT and 2) he might not need to and the stock that he bought might end up tanking which is a bigger risk against which his short call is completely inadequate to protect. That's why I suggested for him to just do a spread with a long call. A short put is still a naked short position with still the downside unprotected.
Buying a call is closer to making sense,except for the fact that he wont get his free lunch.. IOW,if the stock approaches short strike,the call he buys will cost more than the calls sold. He locks in a loss,obviously with less risk The short put part is absurd.No reason to ride short deltas and then flip to .50 long at strike. He still hasn't posted an example. luncch
Delta Gamma Hedging and the Black-Scholes Partial Differential Equation (PDE) Sudhakar Raju Page 19 (labeled 17) of the PDF here. Does this make sense? Can anyone clarify further?
I have an acquaintance that sells Nekked Calls. He maintains that gap downs are more frequent and violent than gap ups. I have no hard data but it sure seems that way to me. He says there's more danger in writing Puts. I just don't have the stones for Nekked Calls.
I suggested a spread. A spread = selling a call and buying a call of with much more otm strike AT THE SAME TIME, not when the shit is hitting the fan. And yes he will still be getting his free lunch, just not as free as before. If he wants PURE PURE free lunch, well then he faces assignment with short squeeze that could result in potentially unlimited loss so there is really no free lunch in the world. Short put is still a naked short with no downside protection and should the underlying tanks, he's suffering huge losses the other way the same as buying stock + shorting a call. The only thing is if he's buying the stock when the price is closer to the short call strike, the possibility of it going up further is higher. You ride the short delta when you can and when you see you no longer can, you try to cover. It's the same thing when you are shorting a stock and then when he sees he's about to be short-squeezed, he buys the stock back and the OP is not planning to buy more than his short call; he's buying exactly the same quantity as his short call, 100 shares for each call. If he's buying only 50% of the short call quantity i.e. 50 shares for 1 call, his short call won't be covered so he's not really overhedging. From the vol. point of view, even though the call option today might be only at 0.50 delta, moving 1/2 as fast as the underlying or only has or close to 50% possibility of going ITM but if it's going ITM, then eventually it will become 1 delta and by that time, what are you going to do? Buy the other half at the price higher than the strike and suffer an instant loss? You might as well buy the whole thing so the entire option is covered if the price is already at 0.5 delta or close to it. Anyway that's how I see it.
It was me who first suggested to use a spread: https://www.elitetrader.com/et/thre...em-just-before-itm.373891/page-3#post-5799383