I am a futures trader so bare with my ignorance of options. #1. When selling a call and a put this is called? and is it naked? Three weeks ago, I sold the 113 strike call @ about a buck and sold the 105 put at about a buck #2. What if I don't want to wait for expire and close the position now assuming it was a real trade and I had 100 lots or more maybe 500 of each, could I cover? I read that out the money options you have sold are nearly impossible to cover, but with SPY high volume could I do this? #3. What if I wait for expiry and both put and call options are out of the money. ?? Thanks for assistance fellow traders. TT
"#1. When selling a call and a put this is called? and is it naked? Three weeks ago, I sold the 113 strike call @ about a buck and sold the 105 put at about a buck" This is usually called a "strangle" and yes it is naked if you do not own any underlying shares or offsetting contracts at different strikes. "#2. What if I don't want to wait for expire and close the position now assuming it was a real trade and I had 100 lots or more maybe 500 of each, could I cover? I read that out the money options you have sold are nearly impossible to cover, but with SPY high volume could I do this?" Yes you can cover. You did not mention the month of expiration - but if the month is November, the contracts are quoted as follows: 113 calls .01 x .02 and 105 puts .02 x .03. The volume is in the thousands for both so there would be no problem closing out. " #3. What if I wait for expiry and both put and call options are out of the money. ??" Then they expire worthless! However, it is sometimes better to close the contracts earlier to avoid risk and make better use of the funds. Hope this helps. AZD
Appreciate the reply arizonadreamer. And yes it was November, it appears the literature I found on the internet may have been a little misleading. I should likely take my own experience from trading and just put it forth to options and learn the old fashioned way. One more question, would brokers let me make a trade like this since it is naked? Would they require more margin than normal?
If you are approved at the level of selling uncovered calls and puts, there should not be a problem. You asked, "Would they require more margin than normal? " Do you mean because you are a beginner in options? Your margin requirements should be consistent with other traders within that brokerage. However, there are some brokerage outfits that do require higher requirements than exchange minimums. It's best to ask your broker about the specifics. Good luck! AZD
I agree with AZD.....most of the time I would just cover options that I've sold. I've paid 5 tics for out of the money options with 15 min to go on expiration Friday--- just never want that jack in the box to jump out and bite me. Note: also lets say an option is 20 cents out of the money- you don't cover and feel really lucky as in -- ''Man, that was some easy money".....then you find that people actually manually exercised the out of the money options due to news pending that night, and then Monday you discover that you have a position on your hands. Yeah- ouch!! Margin: This unfortunately varies with the firm. A good firm will see that the two positions are somewhat offsetting.......some will just hammer you for margin for what they see as two naked sides. Yeah, it's ridiculous in this day and age but what can I tell you. Always just check with who you trade with....avoid problems--always check. Lots: ...yo.....be careful. 100 lots in option land means 10000 options. Errors are very easy to make with options and are costly - even when discovered immediately - due to the bid-ask spread. ( maybe you meant the 100 or 500 lots -- I'm just saying.) CBOE: the hands down best place for options education. cboe.com...you can even call them and they'll talk to you.