SPY is at 100.41, let's say you think SPY at least won't go down much from now until 03/1020. And you want to go long by selling 10 puts. With 100 2010 March put at 8.4, the Options Lab will calculate its IV at 28.46%. Uncheck the Call, and you will see the Theta for 10 short puts is $18.38, which means with eac day passing, you are making $18.38, good ? Did you see the Total vega ? The Options Lab shows $-313.47 !!!, which means if the IV jumps from 28% to 29%, you lose $-313.47 immediately. Remember IV has been as high as 50% only a few months back, want to se how much you are going to lose ? Change Volatility from 28 to 50, and you will see the loss will be $-6857.67, not only that, if IV ever jumps from 28 to 50, very very likely, SPY will drop like a stone from 100 to 70, now change Pice from 100 to 70, then the loss become $-24432.85. that must hurt. You are losing money both ways. How many days's time decay can cover this kind of loss ? 1408 days while the option only has 226 days to live. Now change price from 70 to 100 and leave 50 as IV and hit Exp button, your loss will become a gain of $8314.62. Good ! What is the lesson from al those ? The lesson is it is OK to sell naked put but DO NOT be greedy. Only use a part of your capital to do so. The trip to the promised land is paved with danger. Stay tuned
Here is what I used to do, sell a ES put and put rest of money into T-bill. Since ES options has te same margin requirement as a ES futures about 5% (Now they increase the margin requirement to 10%.) , so I can put up to 95% into T-bill. Even the position is fully covered, it sometimes still keep me awake at night.
Peng and his web-promo is becoming almost a serious nuisance. If he wants to know of other, and much much better option-software, he can download for free the ThinkOrSwim application from www.thinkorswim.com for paper trade (even accessing real-20 minute delayed data on paper mode), or the free OptionsOracle from www.samoasky.com/ --- just to name a couple. So I too hope he will soon stop or be banned. Hopefully the mode will act... ~Bben