i'm still new to options and would like some help understanding them.... I've read many books but trying to just confirm a few things... if say, I short a call option....this is considered a naked call if I'm not mistaken...(can someone please tell me why this is dangerous assuming the market is going in the direction I have chosen?) is it because, if it so happen to dip the other way before ending the day in the predicted direction, someone can close my position without my authorization? please do not give me lectures on that I am not ready and to stay away from options etc. etc. This is precisely why I am asking this question.
Naked options are considered dangerous because they offer limited profit potential for virtually unlimited risk. If you are able to predict direction, you can usually get a better profit/risk profile by trading bull or bear spreads.
Absolutely agree. And if you want more bang potential just buy puts or calls At or IN the money on your expected direction. EVERY short option player gets hit hard eventually. Hell, look at niederhoffer the pro, perfect example.
Risk is lower in selling options naked ( put vs long cash" for you guys lets use the word" stocks") or ( calls vs short stock): hence that is why the reward is smaller then going outright long or short stock.
You don't have to worry about an early exercise on a naked call that you are holding for a short term. The risk is in a big move against you when the market is closed or you are not at your screen. The MM's make their money by selling options because in 4 out of the 5 possible moves in the underlying you make $ by selling options. Likewise in 4 out the 5 possible moves in the underlying, you lose $ by buying options. However, if you don't hedge your naked calls, one big move against you can erase your winning trades. So if the MM's sell you a call, they will eventually buy stock to cover it . Most serious option traders will hedge a short call by buying another call 1-2 strikes beyond the short just to be safe. Day trading options is pretty difficult because of the spread. It takes a big move to make it worthwhile on most stocks. But you can day trade options on something like the QQQQ's where the spread is in pennies and not $5-$10.
when people talk about hedging....doesn't this lesson the amount of leverage you are putting forth? say if you have $3000...and want to get the most leverage, you would probably buy $3000 worth of options or maybe whatever futures contract you decide... but if you say that you recommend hedging with options...then doesn't this mean you're pretty much buying only maybe half as much options and the other half on maybe stock or the opposite direction of that option...which means, you're lessoning the leverage?