selling naked strangles

[beergut]

A guy on another board says he has been able to add an extra paycheck a month by selling far OTM strangles naked.

Basically, he picks a stock that is consistently stable, sells the OTM strangle for 45 days out, then waits until about 21 days to expiration (DTE) and buys it back to close out the position. He says he is able to let theta decay work for him using this strategy, and basically sells when his profit has reached 50%.

Anyone else use this strategy?

I think if you're comfortable with that kind of unlimited risk, you might as well just sell naked puts on the indexes, but I think he likes this method because it is effectively doubling his premium. He did say he doesn't have the cash to handle selling naked on indexes.

[Deleted]

The Risk reward ratio for Naked Strangles to the upside is far to great to justify itself; even in a "range" bound stock.

The reason is that (by the math) the amount of premium will never sufficiently compensate the absolute UNLIMITED RISK to the upside. And when selling Naked CALLS; there is no ceiling on what you can lose if the stock suddenly spikes.

Assessment {example}:

Target Stock is at $60

You Sell 1 $50 Strike {OTM} PUT for say $0.80 (45 days to Expiry) you take in $80 (less fees)

You Sell 1 $70 Strike {OTM} CALL for say $0.80 (45 Days to Expiry) you take in $80 (less fees)

Now lets say something happens overnight; the stock starts to spike in afterhours trading; and continues in pre market trading; the result of this hypothetical spike is $30. Now you have problems; because {A} the stock is now $100 & {B} You can't trade Options in the afterhours or premarket trading sessions.

Result? Well; you just made your $80 on the PUT as it is now worthless (Yea, winner); BUT you just lost > ($3,000). How? On a move like that the OIC will assign the CALL automatically, and for a NAKED CALL, this now put you into a SHORT SALE stock position; which is very underwater & is accruing interest charges as all SHORT SALE Equity positions are on MARGIN.

So you chased $160 (less fees), made $80 and lost thousands. So not really a bright idea.

Maybe he has been LUCKY so far; but make no mistake, every real Options trader knows that {A} A win (profit) doesn't make you a genius; nor does a string of them & {B} Eventually; you will get your ticket punched (get assigned or take a big loss): The "trick" a real options trader employs is running the numbers and seeking the best outcome possible {best possible gain for least risk; least potential loss for best possible premium}.

In a reality; all truth is that things like NAKED STRANGLES should be left well enough alone by the smaller Options trader; as the risks are so great as they can be intolerable. These are best left to the PROS and those with multi millions of dollars that can actually take a big hit and keep on trucking.

As to Selling Naked against Indices; whoa boy. As all Options on Indices are Cash Settled; selling NAKED (not having enough money to satisfy the Contractual Obligation), ensures that you will end up on Margin if Assigned. Additionally, then this means that you could well end up owing far more than the value of everything you own and the MARIGN Loan will just keep accruing interest until such time you can pay it off (if that is you even have a prayer of paying it off)...

This (Selling Naked against Indices) is a situation in which one could very, very easily have say $100,000; get the "bet" wrong and end up owing over $1Million in a damn fast hurry; which once you are in that hole; now you start to get slammed with MARGIN LOAN INTEREST charges, making the mess even worse.

-----------

And NO I am not an Idiot; And YES I do know what I am talking about. I have spent over 5 years very successfully Trading Options, and I have done it by being an Extremely Contrary, Uber Conservative, Hard nosed to the math; very often grumpy, mostly Anal retentive S.O.B.

And really around here if folks were really honest; most would probably say that they find interest in what I post on my thread because: {A} They can actually back check the Regulations and Tax Code I often cite; {B} I am consistent with what post; {C} Stand by my assertions always as to my results: all of which then would lead any reasonable person to say "Well either the guy is lying or He really is doing what he says, And if the latter, is the truth that he is really doing it; then how in the hell is he doing it"

NAKED STRANGLEs are straight up gambling: I don't gamble. I do take risk; but never, ever do I take a risk that could wipe me out and make me penniless, homeless and owing more than I could ever pay in 5 lifetimes.

[bimetalaupt]

Apr 13, 2015 17:55:15 GMT -5 beergut said:

A guy on another board says he has been able to add an extra paycheck a month by selling far OTM strangles naked.

Basically, he picks a stock that is consistently stable, sells the OTM strangle for 45 days out, then waits until about 21 days to expiration (DTE) and buys it back to close out the position. He says he is able to let theta decay work for him using this strategy, and basically sells when his profit has reached 50%.

Anyone else use this strategy?

I think if you're comfortable with that kind of unlimited risk, you might as well just sell naked puts on the indexes, but I think he likes this method because it is effectively doubling his premium. He did say he doesn't have the cash to handle selling naked on indexes.

BEER,

 I DID ABOUT 10 YEARS AGO; IT WOOKED UNTILL IT DID NOT.  YES; YOU NEED A LOT OF CAPITAL AND TIME.  VIX HAS BEEN TOO LOW TO MAKE ENOUGH MONEY FOR THE RISK. 

MY MATH MODEL SHOWS MORE RISK THEN LONG TERM RETURN.

Great question: best of luck,

BiMetalAuPt

[billisonboard]

 (billisonboard is glad he realized this was on the investing board and not on everything else before he posted a comment on erotic asphyxiation)

[bimetalaupt]

Apr 13, 2015 23:24:54 GMT -5 billisonboard said:

 (billisonboard is glad he realized this was on the investing board and not on everything else before he posted a comment on erotic asphyxiation)

I am not sure if you were referring to opinion. It is all about risk and a lot of modeling like MBA stuff. Best of luck!!

[beergut]

Apr 13, 2015 20:08:53 GMT -5 @di said:

-----------

And NO I am not an Idiot; And YES I do know what I am talking about. I have spent over 5 years very successfully Trading Options, and I have done it by being an Extremely Contrary, Uber Conservative, Hard nosed to the math; very often grumpy, mostly Anal retentive S.O.B.

And really around here if folks were really honest; most would probably say that they find interest in what I post on my thread because: {A} They can actually back check the Regulations and Tax Code I often cite; {B} I am consistent with what post; {C} Stand by my assertions always as to my results: all of which then would lead any reasonable person to say "Well either the guy is lying or He really is doing what he says, And if the latter, is the truth that he is really doing it; then how in the hell is he doing it"

NAKED STRANGLEs are straight up gambling: I don't gamble. I do take risk; but never, ever do I take a risk that could wipe me out and make me penniless, homeless and owing more than I could ever pay in 5 lifetimes.

Only part of your post I don't understand is the bold portion. I don't think anyone on here thinks you're an idiot, and I've found the posts you've made on here to be very informative and interesting, i.e. I think you know what you're talking about. 

Thanks for the informed answer.

[Deleted]

beergut

I tend to presume that there are folks who lurk; who may themselves presume the portion to which you chose to highlight.

I also tend to presume when entering any trade that I am in fact the idiot in the trade. And while this has served me well over the years; it also highlights the fact that I am not the most people oriented person.

This can be evidenced in the fact that folks rarely respond to much of anything I post; and when they do my very blunt response's put folks off; which leads folks to rarely respond to anything I post.

So please; if you took the portion you chose to highlight as a slight, I apologize.

[The Virginian]

Apr 13, 2015 23:24:54 GMT -5 billisonboard said:

 (billisonboard is glad he realized this was on the investing board and not on everything else before he posted a comment on erotic asphyxiation)

Sometimes I feel like that only without the erotic part !

[resolution]

I only understand about a quarter of what you guys talk about on this board, so I lurk and don't comment. It's nothing personal though, just lack of understanding. My first impression of the topic matched Bill's.

[Deleted]

resolution

I only understand about a quarter of what you guys talk about on this board, so I lurk and don't comment. It's nothing personal though, just lack of understanding

As I am sure you know; the fastest & easiest way to gaining understanding is to of course ask questions.

There are really only 2 ways one can break free from the old Broker ball & chain: Way 1, just make the jump, learning on the fly and hoping that one is quick enough on the pickup so as mistakes don't hurt to god awful much (both financially and emotionally speaking; OR Way 2 find a competent group of Self Directed Investors who can help to flatten the learning curve.

I would tend to say that the group here falls under the auspices of Way 2. I would also lean towards saying that folks around here would have no issue breaking down thoughts posed to very basic parts and explanations, if asked.

Asking those questions for simplified (as much as possible) answers serves a dual function:

{1} It helps the person asking the question to find the "line"; which is the nugget of info that is the basis for the thought and/or use of the process or tool, that is being spoken to or about; AND

{2} It reintroduces, brings back to the surface basic realities, processes, reasons and principals which more Seasoned Self Directed investors tend as a pure function of progression over time take more or less as a given. Which really in all honesty is what more oft than not leaves Seasoned Self Directed Investors in a place where all in all they end up in a position in which they do things because they "know", but yet can't place a finger on it; a real "I know this is right, but I don't know why" position; which is an expression of one has done something so long, certain things become ingrained and as thus, reaction or action has become fairly second nature.

Questions seeking simplification & clarity then provide "fresh eyes" to the nature of things & the mechanical aspects of the pursuit; which then can really breathe new "life" into the mix.

Of all the things that I have posted over the years that I know are true; what I am saying here ranks right up there in the top 3 of truism;

I know this as there have been may times in which folks have brought questions to bear, which have at the end of the day, made me take a second look at things which; I have come to not give a second thought.

A recent example of that is the questions and parlay that Ombud engaged me in, with in the Options thread: parlay which has as a result refreshed certain things for me and as thus then has set me along a slightly different path; which has thus far been a good thing.

[bimetalaupt]

I think if you're comfortable with that kind of unlimited risk, you might as well just sell naked puts on the indexes, but I think he likes this method because it is effectively doubling his premium. He did say he doesn't have the cash to handle selling naked on indexes.

Beer,

This is a lot more complex then you or D.I. post per Dr. John Hull on page 319 - 325 o ( Options, Futures and Other Derivatives).  The state of your portfolio must be Gamma Neutral to reduce risk  to a normal level.  The math was processed by a program call MBA I bought in London.  The time to master this was huge as was the risk.  I did make money.

Also you might need to do a stress test as the fact when the market goes crazy you can lose it all in a very short time.  (Hull page 357, 14.9  Stress Testing and Back-testing). 

My current testy model shows DJIA risk on weighted average overprice by 28% so selling Naked puts could be expensive to the capital.

Best to you too:

Just a thought,

BiMetalAuPt

[beergut]

Apr 14, 2015 17:12:05 GMT -5 bimetalaupt said:

I think if you're comfortable with that kind of unlimited risk, you might as well just sell naked puts on the indexes, but I think he likes this method because it is effectively doubling his premium. He did say he doesn't have the cash to handle selling naked on indexes.

Beer,

This is a lot more complex then you or D.I. post per Dr. John Hull on page 319 - 325 o ( Options, Futures and Other Derivatives).  The state of your portfolio must be Gamma Neutral to reduce risk  to a normal level.  The math was processed by a program call MBA I bought in London.  The time to master this was huge as was the risk.  I did make money.

Also you might need to do a stress test as the fact when the market goes crazy you can lose it all in a very short time.  (Hull page 357, 14.9  Stress Testing and Back-testing). 

My current testy model shows DJIA risk on weighted average overprice by 28% so selling Naked puts could be expensive to the capital.

Best to you too:

Just a thought,

BiMetalAuPt

I've seen you reference this book before, is it your 'options bible' of sorts? 

I've found it online, I'll need to take a look. 

[beergut]

Apr 14, 2015 4:24:43 GMT -5 @di said:

beergut

I tend to presume that there are folks who lurk; who may themselves presume the portion to which you chose to highlight.

I also tend to presume when entering any trade that I am in fact the idiot in the trade. And while this has served me well over the years; it also highlights the fact that I am not the most people oriented person.

This can be evidenced in the fact that folks rarely respond to much of anything I post; and when they do my very blunt response's put folks off; which leads folks to rarely respond to anything I post.

So please; if you took the portion you chose to highlight as a slight, I apologize.

I used to coach sports, so I'm not worried about people being blunt when I ask a question. I'm a firm believer that if you ask a question and someone tells you you're an idiot, you don't listen to what they said, you listen to the explanation of why you're an idiot. That's how you learn. 

Carry on....

[Deleted]

bimetalaupt

My current testy model shows DJIA risk on weighted average overprice by 28% so selling Naked puts could be expensive to the capital

Which is why; if you do what I do; you would currently be looking for companies, which have been devalued by rights of dismissiveness by investors (which would of course be chucking it to the curb to chase more high flying stuff), ignored for various reasons (like interest rate sensitivity) or out rightly vilified for whatever reason.

If then you find a company like that which is at the core solid and has been decent, but lagging, undervalued or overly punished (stock price wise); then well if you are like me that company {and it's Options; especially the PUTS} are a virtual candy bowl: if of course you are looking in the right place {Strike, Expiry Date}.

A Prime Example at the present is T {AT&T} PUT Options. I am running one presently which would put me in in an assignment situation at $30 and low change for a Cost Basis.

For the end result in my portfolio as to CASH position, Stock Position relating to the Bottom Line in the result of an assignment; as compared to the potential Residual return per annum and the forward stability picture of all things in the AT&T picture; I can say that:

{A} For the Cash I would have to spend beyond the Premium I received for SELLING THE PUTs ($22K) I would be more that ok with ending up with 1,000 shares of AT&T

{B} Given the Corporate actions of holding the dividend steady, raising the dividend over the years, I would be comfortable with the take that the Dividend was for now at least in no danger.

Which really boils down to say that I am comfortable with the Risk, which I am undertaking at the present and by the math am being in this issue more than adequately compensated for the undertaking of that risk.

Face it Bruce, all in all the PUT OPTION Quad of the Options Chain across the board is really starting to set it self up to be a candy store for the at least informed Options Trader...

Reason is that many, many Options Chains are forming up presently to present opportunities to engage Full Risk On trades which in an Assignment Situation, would leave the Savvy Options Trader in a Stock Position with a Seriously Nice Discount Cost Basis wise to Fair Value Corporate Value when all factors {Property, Cash Flow, Cash Reserve, Earnings, Product Flows; ETC.} are squarely and fairly accounted.  

[bimetalaupt]

D.I.,

YES: IT IS EASY TO GET YOUR CAPITAL PLEDGED AGAINST NAKED PUTS WITH LITTLE INCOME. I HAVE ADDED KASH FOR THE NEXT CORRECTION RATHER THEN WRITING PUTS.  THE OLD SYSTEM HAD BEEN ABOUT BUYING 30 YEAR T-BONDS AND WRITING NAKED PUT UNTIL YOU WERE PUT ONTO THEN COVERED CALLS. IT IS ALL MATH.

Just a thought,

BiMetalAuPt AKA Bruce

[Deleted]

bimetalaupt

Following the stratagem that We developed; which We have fully utilized for over 5 year now: We have actually been able to do both {Build Cash & Write PUTS}.

The beauty in the mix is that, the Stratagem has indicators built in that "flash sign"; when those flash the call to action is to tighten down.

Which is what We have done: the end assessment of the stance for Us in an assignment situation would be 75/25; Ergo 75% Cash, 25% Equities. Which of course would end up returning roughly 7.5% per annum on the principal then invested in equities (as long as the dividends held) and what ever then then current Interest Rate on Savings provided.

More importantly, the 75% Cash Position that would be left; would at that point afford Us a "Power Position" in the ensuing aftermath...

Remember it is more what you do before a major market fall that counts the most: do the wrong thing in the set up as per RISK & MOAT; you will stand little chance of doing the right things during such an event, and no chance of capitalizing on opportunities in the aftermath of such an event..

Truth that far too many folks learned (once again) during the throes of the 2007-2009 event.