If an underlying is trading at 100, and I write a naked ATM put for, say, 10, and the vol goes to 250 from 20 in a day, wouldn't that put, pardon the pun, me out of business or at least prompt a margin call? And isn't that riskier than buying the stock for 100 and writing an ATM call. No margin call there because there is no margin. I just lose on the stock decline, presuming the vol spike was from a fall in price. I see the logic, options coach, if the put is cash-secured. But the risk with a naked short put seems greater than a covered call to me, for no other reason than the margin inherent in a naked put. What am I missing?
There's no margin call because your shares are fully paid. You plunk down 90 bucks for the $100 share and get the balance from the $10 call. In the naked put example, suppose you had 90 bucks in your account and you wrote the 100 put naked for $10. You now have $100 cash money and a naked put that can never be worth more than -$100. You will never get a margin call.
If you are overleveraged on the CC and short put equally then a drop in stock price will lead to a margin call on both. Vol certainly adds a new wrinkle to the short put both on spikes and collapses where it can help you. Whether one is riskier depends on your definition since by definition both have the same max risk.
nravo...have you considered straddling the market with futures only...ex. short ES long YM and playing the movement? Heard the talking heads say with the new addition to the dow that the s&p and dow now track each other rather closely. I've often wondered if futures traders do this when big news is about to break. Theoretically you would "break even" however depending on how you trade the straddle...scalping here and there could you make a little without much risk?
You do not state what you would do about the now naked short option if the stop on the future is hit. While the CC and the CP are equivalent to a NP and NC, respectively, the use of a stop on the underlying alters that equivalency. IMO, it would be unwise to use a stop on a naked option position. Using a stop on ES is feasible, but then what?
Write a new CC, turning the suddenly naked call into a ratio bull call? Not eliminating risk. But reducing it. Thoughts?
Just to sort this out in my mind - you begin with a synthetic short straddle long/short underlying and short ATM call/put. The long future is stopped out so you have an OTM NC + a synthetic OTM NC. Write another CC (strike?) and you'd have a essentially a 1:3 ratio write using call equivalents. Looking at it another way - say you started with a short strangle - using the same stops. Then instead of the long future stopped out - you'd short one. So instead of adding A CC you'd buy back the short future and sell another call - leaving you with one naked put and two naked calls. Yes, no getting around risk here. As with many writng strategies; you could have months of winners until you hit the wrong market with this strategy. You've mentioned whipsaw moves or any major move and the reality of those scenarios is not pretty. If you have some directional skills, then this strategy could be traded - although it's overly complex. If you are predicting a rangebound market or lower volatility - then the short strangle is viable - especially in high IV environments. If you are making no predictions, then I'd suggest strategies that are net long options, such as ratio backspreads, would be preferable along with some criteria for IV levels - this would at least keep risk at fairly predictable levels.
Thanks. I understand that a short strangle from the get-go makes this entire trade less complex with, roughly, the same risk profile. I just like the added protection of an underlying, I guess. Or am I fooling myself? I'll look into the ratio back spreads, haven't thought about them.
Yeah, just fooling yourself. Thanks for the ideas, though. I've spent years mulling various strategies over - and it all comes back to - you have to predict something.
The put-call parity comes with many ifs: 1. both positions are assumed to be held until expiration. Equivalence is in terms of dollar loss/gain, and not in term of percent returns. 2. Many things can get you out of the equivalent position such as over leverage. 3. Valid only for european style options. Excercise risk can invalidate 1. 4. There are other risks, liquidity, interest rate risk, etc. 5. They may not be equivalent with regard to the greeks if exercise is american style. So essentially, they can differ depending on the path of either position from opening until expiration day, on financial situation and other external variables. One area where NP can be better than CC is if one is doing CC using margin. Then NP is better as there will be saving on the borrowed funds used in a CC. The return on margin is higher, but you have the risk of being taken out of your position as you mentioned with the vol thing in addition to bid/ask spreads. If you are overleveraged, one has to make sure to control the short option excercise.