If you want to sell naked use the ES options on futures. They are SPAN margined which is much more generous than Reg T. You can sell the straddle for the same margin requirement.
1. That is why we never sell naked options on SPX, the margin requirements are way too high. Credit spreads are way better. 2. Yu Dee Chang and his cohorts are selling deep OTM naked puts on the SPX. The margin is high but they usually sell against a cash portfolio. They are managing a large sum of money so they can sell naked puts and even leverage it up with generous margin rules. As for their annulized returns, I never believe anything I read. If they are making 64% a year than they are leveraging up their accounts. Then again they only need to shoot for 6% a month with no losses to get there and if they have good margin requirements, like risk-based haircuts, then it is certainly achievable. But a lot of risk is being taken on.
Wow ! Now thats what I call a quick reply ! Thanks, just21 and optioncoach. But I still dont understand how the performances of some CTAs are achieved. I have attached a pdf with Changs performance. For example in Sep 2004, he had a return of 4,13%. How is this possible, if he writes only naked OTM-options ? I dont know if it really has something to do with leverage. Lets say Chang has 100 mio. under management, money from his clients. If his performance sheet claims that he made 4% for one month, i assume that he made 4 mio. profit, and that he was only using his clients money to achieve this goal. Where should he get additional money for extra margin from ? I dont think he can go to a bank and say "hey, please lend me 500 mio., i want to write some SPX options". So i think the only money he can use as margin is the money he gets to manage from his clients. But then I dont understand how he can make profits like 4% per month, or even over 30% (Oct 2001). So how he can get those returns ?
If he is trading through a professional firm he is getting risk-based haircuts which means you do not have to put up the full margin to sell the puts. Thus he can sell more on less capital and her can easily hedge using futures or other derivatives. Margin and leverage are not about going to a bank for a loan. You trade futures on margin without borrowing money upfront. It is like credit extended for the trade from the broker. I honestly do not know what strategies he trades but with deep OTM puts and volume he can certainly make those kind of returns in a market wihtout large drops lower as long as he hedges his risk. We had a discussion a few pages ago about risk-based haircut which explains that better but basically it measures capital at risk on a given day as opposed to requiring the full margin up front. Also he may roll into condors for certian months where 10% returns are possible. Also he may hedge and add more positions along the way and keep increasing the credits he takes in. Lots of ways but certainly is living on the edge without good risk managmeent.
Coach, You probably already covered this subject but I wanted to know how to calculate the protection needed for a potentially threatened existing OTM spread. I was reading ASK SLIM's column on Red Option and it made me a bit queasy (all doom and gloom) http://www.redoption.com/commentary/12/ I've sold the FEB 1230/1220 PUT spread and would like to protect it with a SPY hedge. How would I select a strike and how would I calculate the number ? Would I take a look at overall delta as a gauge ? Thanks.
Well first you have to realize that you cannot perfectly or even significantly hedge an SPX position with SPYs because the cost will be so high as to wipe out any potential profit and possibly lead to an even larger loss. When I use the SPYs I like to use them as partial hedges to help offset any losses or finance an adjustment if needed. For now the SPX has bounced off support and you still have 37 points of room. However an upday is not a bad day to add a hedge since you will find the puts cheaper than a down day. Perhaps tomorrow will be flat so you can take your time and decide. If you are looking for partial hedges you can look at the 124 or 125 SPY strikes since they are above your put spreads and can hedge on the way down. However they will cost since they are only slightly OTM with the SPY at just under 127. YOu could look into bear put spreads. The number of contracts depends on how much of your premium you are willing to spend on hedges YOu cannot just put the hedge on and leave all alone. YOu have to have an exit point as well. So if you ar really nervous you cna look at spending 50% of your premium on partial hedges. YOu could also look into rolling into a Prego Fly by purchasing SPX put debit spreads. A lot of this is hard to answer since we are talking hypothetical with no prices. If you are truly scared and have a profit, then take it and get out. If it is a concern then add some SPY hedges so if the market falls you make some money on the SPY hedges to finance an adjustment lower or reduce the loss in getting out. If you want to look into those PREGO FLYs then I would need some prices and number of contracts.
It's a bit after the fact but I still wanted your opinion. My PUT side was (60) 1230/1225's for .25, and (40) 1225/1220's for .40. Today I opened (40) FEB 1320/1315 CALLS spread for .30 and used the $$ to buy (20) SPY 124 PUTS @ .50 per.
Coach, if there are such high margin requirements for writing SPX options, why dont you sell options on other contracts ? I just had a quick look on the eurex-website. For example, you could sell a Feb. CALL on the SMI (swiss market index), premium would be 130⬠for the 8000-Call (SMI now at 7692). For that trade, you only need a total margin of 1300â¬. I think for a similar premium in the SPX-options you would need more than 100.000$ margin. So why do you only trade the SPX-options ? just21 mentioned the ES-options. What are the advantages and disadvantages of these options, compared to the SPX-options ?
Coach, Interested in what you were saying about using the cash in your account for other interest bearing investments that can still be used for margin. Can you do this in an Interactive Brokers account? I am mainly in cash and leave at least 50% free to delta hedge naked positions. How does it work with your broker?