Absolutely spot-on! OptionsTrader - were you around in the markets for 19th Oct 1987? The market fell 20% with no opportunity to get out before the damage was done. And nothing had actually happened! What would that do to a naked put on ANY index? Would your account survive? Would you get to keep your house? And what do you tell your wife/partner when it has to be put up for sale? I guess you could make it into a film - "Honey I shrunk the Pension"
Was there <i>really</i> no opportunity to get out? Or was everyone standing around saying, "it will turn around." I wasn't trading back then, but I can imagine there were opportunities to exit. -ND
Here's the chart. There was an ominous down day on the Friday, and I bet traders were saying the market is oversold - tough it out - it'll bounce back. Monday saw a plunge and traders were trapped in positions because it was pre-electronic trading for retailers and brokers just didn't pick up the phones. In the UK the position was even worse because there had been a devastating storm across the south of England on the previous Thursday night, power lines were down across the country and the LSE was closed for the whole of the Friday negative session in the US. I remember it well. I had put £3500 into a mutual fund in July and was already concerned at the change in trend. I eventually got out with £1900.
there is always an opportunity to get out. however it when a market gaps it could come at a heavy price. keep in mind besides the delta move, volatility often explodes during such gaps.
I wasn't trading either back then but if I remember right there were opportunities to get out because the market fell during the day driven by "portfolio insurance" selling volume.
I had never even heard of options in those days. I guess if you could get thru to a broker you could get out at some price. I believe the VIX had yet to be invented, but I think I read somewhere that had it been in existence, it would have been at about 176. So if you were short naked puts, how much would they have cost to buy back? This was the point I was trying to make rather than whether you could physically get an order thru. I bet if you were short puts your broker would either give you a margin call or buy your position back no matter what it cost you.
you wouldn't buy them back. you'd hedge with the underlying. now, if you were overmargined, that's a different story -nd
I think that's the only way to be a seller, if you want to stay in the business long. But that means your ROE is about 10% - 15% annually from what I see. Selling option naked is a big money game. If your capital is limited and you set profit target 20% or more, sooner or later you'll blow up.