I am a newbie. Could you explain to me why this would be dangerous? He recommends exit strategies, such as if the ootion doubles in value, get out? Could someone explain why this is dangerous?
One risk management plan is to get out if the option doubles in value. Then you may want to sell further away because the high volatility would be present. Second, is to get out when the underlying reaches a certain value. Another is to short a strangle.
Commodities show call-side skew for a good reason - it is not uncommon to see rapid increases to the upside. While $90 oil sound like a rather impossible story, you might see implied vols rally jointly with the asset (i.e. in case of some terror act related to middle east) and margin calls are going to be hard to swallow. We have seen oil go 10 dollars in a week not so long ago.
No, my bad, read your post quick and seen you put naked writing. Does he alude to any type of track record and does he mention in his book about doing this in his own account?
The premium is all vega, no gamma/theta. Meaning the decay is very small, but it's highly leveraged to volatility. If vols go down, great, but he can lose on vol + direction. Since there is call skew the strip-vols are sure to increase on rallies. One small comfort is the vol-skew will flatten when spot > $80, hahaha.
Why would you think so? I thought that oil and gold are almost perfect examples of inverse lognormal markets.