Losses predetermined and limited at the cost of having a lower probability of profit. If spreads were so great, everyone would be trading them. I sell mostly naked and it's worked fine for me. I keep my position size small and spread my risk out over lots of different positions. The more speculative and volatile the stock, the smaller my position size. If the premium always went to 0 by expiration, no one would be buying options. There has to be a non-linear payoff in order to make it attractive. Insurance companies have been doing fine for many years by operating a similar model. Most of the time, they happily collect $1000 or so a year from every customer, but every once in a while, there's a million $ payout.
You should never be naked. Buying DOTM insurance against your writes will protect you from Enron-esque situations like TSLA. Sosnoff and his merry band of shills will tell you being naked is fine, but owning units will save your life.
You should also never drive because you could get in a fatal car accident. Probabilities of outcome matter. Explained it before, but selling a naked put is always safer than owning 100 shares of the underlying. Not recommending doing that in all cases, but the maximum loss is less with the short put.
That is simply not true. The guy could have sold calls for $6.5 and bought at higher for $2 (making it vertical) and the same probability of profit. Once in a while, a bankruptcy. Dude, you are selling, not buying, so no million dollar payout. As a naked seller, your profits are predetermined.
Not buying units on a naked position is like not wearing a seat belt in your analogy. Are you seriously telling me that paying 1-2c per contract DOTM is too expensive when a black swan could take your house? A seat belt is cheap insurance for when you get into a fender bender in an intersection and break your neck in 3 places because the thrill of no seat belt is what gets you off. Units are no different. The funny thing about fender benders and black swans is by nature you can't anticipate them. So wear your seatbelt.
Hard core tales from the cruel world of men and money. I certainly feel bad for this guy. Jack Schwager said something about option selling that went like this: Selling is low volatility but high risk, buying is high volatility but low risk. Makes sense once you have some experience with both. But we do refer to outright option selling as NAKED for a good reason right? That is, you sold your way into the condition of having no clothes on. And when/if the weather changes; you will be cold, scared and extremely vulnerable.
Wrong. It is mathematically true. Say you sell a $10 call on XYZ and collect $1. Your break-even is $11. To sell that same call with protection, that higher strike will cost you something and therefore lower your break-even which will be something less than $11. If we are talking same duration, those $6.50 calls would have to have a lower strike and therefore lower break-even and consequently a lower probability of making a profit although also lower, fixed risk with the spread. If you go out in duration, that may not change probability of profit, but the underlying would have more potential to make a bigger move relative to choosing a shorter duration. Obviously. Here's what I said: "Most of the time, they happily collect $1000 or so a year from every customer, but every once in a while, there's a million $ payout." By "payout" I meant that they occasionally have to pay a large sum of money. The option seller's maximum gain is limited to the premium. Thousands of people die every year despite wearing a seat belt so my point still stands. Those 1-2 cents per contract are that cheap because the market thinks it is an extremely unlikely event. It's like buying a lottery ticket. Again, the insurance analogy. Why would an insurance company sell an auto-insurance policy covering about half a million worth of medical and property damage liability for only a few hundred per year? That is the picking up pennies in front of a steam roller example. They have been doing this for a long time and insurance companies make good money. And if the business model is so risky, why would Buffett buy an insurance company?
There is a group of people I know who exclusively write options, usually naked, for over a decade and consistently beat the benchmark SPY, especially in bear markets. It all comes down to knowing what you are doing. For me, I don't mind writing naked puts but stay away from naked calls.