Doing Nakeds Is A Great Investment Tool

[Daniel Mollat]

I'm a new member of this forum. After reviewing almost all the posts on the folder on options I notice there is an absence of any discussion on the lucrative option trading strategy of writing naked options. Doesn't anybody here use this strategy as a highly profitable long term investment system?

For many years I was an option trader doing mostly long trades like most of you. But in recent years I discovered that writing nakeds is far more lucrative in the long run than being an option buyer. While there are no home runs in naked writing like you would have in buying options, the consistent, steady returns are far more rewarding for the long term investor. This strategy is suitable for someone with enough capital base and looking to grow wealth steadily and surely over time. It's not a get-rich-quick option strategy.

An an option writer I'm doing extremely well following a disciplined trading system that conquers the 'risk' factor of nakeds. If anyone here is doing the same thing I would like to hear from them and perhaps get a discussion going for the benefit of those who have never ventured into this.

[wallstreetsedge]

well yeah it is a good strategy but its not something i recommend for everyone... first some brokers will require that you need a high minimum to be approved, experience, and high requirements which i dont think most people on this board would qualify for

next is the risk tolerance...

naked calls have unlimited risk, technically a stock could get bought out and can shoot up 10000%

naked puts are great but again not for everyone. ive seen people sell naked puts on companies like aapl, sndk, goog, and bsc who took heavy beatings. and with everything going on in this mkt, i dont think we hit a bottom. add to that the fact that theres no longer an uptick rule on shorting stocks and it makes it a dangerous game for beginners.

bottom line is even if you wanted to do something involving options to improve your gains, the best way to do it would be through either the use of a covered call strategy or an option spread which is a bit more aggressive

[aiki14]

I write naked options on occasion, but I wouldn't recommend it for most people. I get solicited all the time by these outfits that do that and are looking for people to get in on the action. I look at that as a warning sign, in the "if it's so good, why do they need my money" category.
The bottom line is it works until it doesn't and then you get your ass kicked.
I would be interested in hearing how the OP mitigates the risk while profiting and if the strategy works out any better than an equity or equity and options strategy with equal or lower risk.

[wallstreetsedge]

yeah i highly doubt that these people actively manage an option position. it would be too time consuming for them to perform especially for some sort of subscription service

[dabrozio]

Yes, writing naked options is definitely not for the novice options trader as it could spell great loses for someone who doesn't know what he's doing. But for those who are quite knowledgeable in the intricate workings of options, naked writing is certainly a highly profitable trading strategy that offers consistently good returns for the long term investor.

[aiki14]

Call me a cynic, but two first posts on this topic? I wonder how long it'll be before the come on for investors in the strategy appears. The folks who make the most on these systems are the guys who pocket the commissions as I see it.

So in the event I am incorrect about the motivation of the posters, how about a brief description of the strategy you use to achieve "consistently good returns for the long term investor" using option writing.
If you're just gonna say write deep out of the money contracts, then I stand by my earlier post, it'll work til it doesn't and then it's a serious mess.

[wallstreetsedge]

yep even our friend don took a beating in recent months lol

[peter518]

Great post. I knew some guys who wrote options got wiped out. The risk is too big for most investors.

I would simply buy long-term call/put options of some leading stocks on weakness.

Cheers!

Peter

wallstreetsedge[/LEFT];114351]well yeah it is a good strategy but its not something i recommend for everyone... first some brokers will require that you need a high minimum to be approved, experience, and high requirements which i dont think most people on this board would qualify for

next is the risk tolerance...

naked calls have unlimited risk, technically a stock could get bought out and can shoot up 10000%

naked puts are great but again not for everyone. ive seen people sell naked puts on companies like aapl, sndk, goog, and bsc who took heavy beatings. and with everything going on in this mkt, i dont think we hit a bottom. add to that the fact that theres no longer an uptick rule on shorting stocks and it makes it a dangerous game for beginners.

bottom line is even if you wanted to do something involving options to improve your gains, the best way to do it would be through either the use of a covered call strategy or an option spread which is a bit more aggressive

[mattjames1]

I'm learning about options and don't think I would do nakeds. There just seems to be too much risk. My question to the poster is, what is a good stock to do nakeds on?

[aiki14]

I'm learning about options and don't think I would do nakeds. There just seems to be too much risk. My question to the poster is, what is a good stock to do nakeds on?

The quick answer is one who's direction you can most accurately predict, or one that is very stable.
If you have a stock that has stayed the same price for a long time and you feel it is likely to remain so, you can write both puts and calls on it. The tighter the range the closer to the money you can write the contracts and the more money you can make.
The other thing you need to be aware of is the volume of contracts traded. If you want to write a few hundred calls on a stock that only trades 10 contracts you wont get them traded.

The typical system is to write far out of the money calls on NYSE stocks with low Beta's. The problem is that they are cheap so you have to sell a ton of them to make any money. So you sell 1000 calls on some stock for .15 or something and you make yourself $15k, but the next day they announce a buyer has made a big offer and suddenly you are obligated to sell 100,000 shares $10 above the strike. It's improbable but not impossible, and guys have been crushed in that scenario.

Hope that helps.

[netwrangler]

The quick answer is [a stock] who's direction you can most accurately predict....
Aiki is right. And the full story is, if you can predict that, there are lots of ways to make money.
Almost all of them carry much less risk than selling naked calls.

Can the knowledgeable investor make money here?
It is certainly possible.
Is selling naked calls the route that most knowledgeable investors would take?
Not bloody likely.
Check the literature.
This sounds like a classic "secret way to investment riches that the 'big boys' don't want you to know about!"

Oh for sure!
And if you believe that, I have this bridge from Manhattan to Brooklyn that I'd like to sell you. :mrgreen:

[cramerica1972]

Aiki is right. And the full story is, if you can predict that, there are lots of ways to make money.
Almost all of them carry much less risk than selling naked calls.

Can the knowledgeable investor make money here?
It is certainly possible.
Is selling naked calls the route that most knowledgeable investors would take?
Not bloody likely.
Check the literature.
This sounds like a classic "secret way to investment riches that the 'big boys' don't want you to know about!"

Oh for sure!
And if you believe that, I have this bridge from Manhattan to Brooklyn that I'd like to sell you. :mrgreen:how long before naked calls be made illegal?isnt naked short selling illegal?

[aiki14]

how long before naked calls be made illegal?isnt naked short selling illegal?

Different concept, selling naked options does not allow for manipulation of the stock price.

[dabrozio]

Call me a cynic, but two first posts on this topic? I wonder how long it'll be before the come on for investors in the strategy appears. The folks who make the most on these systems are the guys who pocket the commissions as I see it.

So in the event I am incorrect about the motivation of the posters, how about a brief description of the strategy you use to achieve "consistently good returns for the long term investor" using option writing.
If you're just gonna say write deep out of the money contracts, then I stand by my earlier post, it'll work til it doesn't and then it's a serious mess.

Oh I could give a brief description of the option selling strategy that I use but judging from the responses so far, I doubt it’s going to serve any purpose at all. Except maybe for you, aiki14 (http://www.onlinetradersforum.com/member.php?u=2692), it is looking like this forum’s members do not yet have the maturity and experience in options trading to understand how some seasoned option traders do make good with nakeds. And I doubt that I could present the trading system in simple enough terms for the novice trader to understand since it involves the use of three trading strategies all coupled into one disciplined program.

Let me say that it does not involve selling in the money contracts. On the contrary, it involves selling out of the money contracts. The program starts with the trader opening a strangle by selling both puts and calls (out of the money) on the same underlying security but not necessarily in the same month. It is then followed up by creating a modified credit spread as the security to which it is tied moves up or down. Then as a third protective measure, the system makes wide use of the rolling out method if and when a position is in danger of getting in-the-money. I won’t go further than this because it appears to be pointless when there is so much negativity here.

As a last point, I never sell options on stocks. All my options sales are in ETFs or indexes which are fairly stable and provide decent premiums. They also are very widely traded which guarantees total liquidity.

[netwrangler]

Oh I could give a brief description of the option selling strategy that I use but judging from the responses so far, I doubt it’s going to serve any purpose at all. Except maybe for you, aiki14 (http://www.onlinetradersforum.com/member.php?u=2692), it is looking like this forum’s members do not yet have the maturity and experience in options trading to understand how some seasoned option traders do make good with nakeds.
You got it, dabrozio. We're just a bunch of rubes. No use wasting your time.
8O

[Keventerprises]

Oh I could give a brief description of the option selling strategy that I use but judging from the responses so far, I doubt it’s going to serve any purpose at all. Except maybe for you, aiki14 (http://www.onlinetradersforum.com/member.php?u=2692), it is looking like this forum’s members do not yet have the maturity and experience in options trading to understand how some seasoned option traders do make good with nakeds. And I doubt that I could present the trading system in simple enough terms for the novice trader to understand since it involves the use of three trading strategies all coupled into one disciplined program.

Let me say that it does not involve selling in the money contracts. On the contrary, it involves selling out of the money contracts. The program starts with the trader opening a strangle by selling both puts and calls (out of the money) on the same underlying security but not necessarily in the same month. It is then followed up by creating a modified credit spread as the security to which it is tied moves up or down. Then as a third protective measure, the system makes wide use of the rolling out method if and when a position is in danger of getting in-the-money. I won’t go further than this because it appears to be pointless when there is so much negativity here.

As a last point, I never sell options on stocks. All my options sales are in ETFs or indexes which are fairly stable and provide decent premiums. They also are very widely traded which guarantees total liquidity.

How arrogant and condescending can you be? You are lucky to be alive, let alone communicate and give to these great people! We get you 'Fly Boys' through here about once a month. Lead, follow or get out of the way!

[aiki14]

Oh I could give a brief description of the option selling strategy that I use but judging from the responses so far, I doubt it’s going to serve any purpose at all. Except maybe for you, aiki14 (http://www.onlinetradersforum.com/member.php?u=2692), it is looking like this forum’s members do not yet have the maturity and experience in options trading to understand how some seasoned option traders do make good with nakeds. And I doubt that I could present the trading system in simple enough terms for the novice trader to understand since it involves the use of three trading strategies all coupled into one disciplined program.

Let me say that it does not involve selling in the money contracts. On the contrary, it involves selling out of the money contracts. The program starts with the trader opening a strangle by selling both puts and calls (out of the money) on the same underlying security but not necessarily in the same month. It is then followed up by creating a modified credit spread as the security to which it is tied moves up or down. Then as a third protective measure, the system makes wide use of the rolling out method if and when a position is in danger of getting in-the-money. I won’t go further than this because it appears to be pointless when there is so much negativity here.

As a last point, I never sell options on stocks. All my options sales are in ETFs or indexes which are fairly stable and provide decent premiums. They also are very widely traded which guarantees total liquidity.

I see your already getting abused for this post, and rightly so, it's pompous and unnecessarily confrontational.
However, for the folks who wish to consider a naked option strategy for their portfolio, a couple of sensible things are said. First is using ETF's as a starting point rather than an individual stock, as it's less likely to see radical moves that kill you. Second is writing on both sides of the position (Calls and Puts) as a basic tenet of the strategy. Third is layering protection, the OP mentions a modified credit spread and rolling out, which reduces overall risk. Note these protective layers cut into your profit, there is no free lunch.
So why not do it?
Well for one thing, you'll need to bring a fairly substantial bankroll to the table. I can't imagine anyone even considering offering level 3options to an acct less than $100k. Merrill requires $250k and the rights to my first born practically just to get in the game.
2nd, no matter how deep the protection and how stable the underlying position, there is always the risk of this going south in a major way. Even an ETF can be subject to influences that spawn large moves, over a weekend, and your risk can still be very high.

There is a place for this strategy though, and folks who can use it in a disciplined manner can make money, but it has to be viewed in a rational way, and considered very carefully.

[wallstreetsedge]

or we could always just state the obvious to people.. dont trade options until you know how to trade stock :)

[Keventerprises]

I see your already getting abused for this post, and rightly so, it's pompous and unnecessarily confrontational.
However, for the folks who wish to consider a naked option strategy for their portfolio, a couple of sensible things are said. First is using ETF's as a starting point rather than an individual stock, as it's less likely to see radical moves that kill you. Second is writing on both sides of the position (Calls and Puts) as a basic tenet of the strategy. Third is layering protection, the OP mentions a modified credit spread and rolling out, which reduces overall risk. Note these protective layers cut into your profit, there is no free lunch.
So why not do it?
Well for one thing, you'll need to bring a fairly substantial bankroll to the table. I can't imagine anyone even considering offering level 3options to an acct less than $100k. Merrill requires $250k and the rights to my first born practically just to get in the game.
2nd, no matter how deep the protection and how stable the underlying position, there is always the risk of this going south in a major way. Even an ETF can be subject to influences that spawn large moves, over a weekend, and your risk can still be very high.

There is a place for this strategy though, and folks who can use it in a disciplined manner can make money, but it has to be viewed in a rational way, and considered very carefully.

Well said, Aiki! BTW, good previous use of the word Etiology. I did not know that word.

Wikipedia:
Etiology (alternatively aetiology, aitiology) is the study of causation. Derived from the Greek αιτιολογία, "giving a reason for" (αἰτία "cause" + -λογία).[1]

The word is most commonly used in medical and philosophical theories, where it is used to refer to the study of why things occur, or even the reasons behind the way that things act, and is used in philosophy, physics, psychology, government, medicine, and biology in reference to the causes of various phenomena. An Etiological myth is a myth intended to explain a name or create a mythic history for a place or family.

:top:

p.s. Prior to Charles Lister, they called germs a 'Miasma', that crept in through the windows, while they were wiping their blood stained hands on their apron.

[Keventerprises]

I write naked options on occasion, but I wouldn't recommend it for most people. I get solicited all the time by these outfits that do that and are looking for people to get in on the action. I look at that as a warning sign, in the "if it's so good, why do they need my money" category.
The bottom line is it works until it doesn't and then you get your ass kicked.
I would be interested in hearing how the OP mitigates the risk while profiting and if the strategy works out any better than an equity or equity and options strategy with equal or lower risk.

So far dabrozio is only right about one thing. Aiki, you are very good.

[wallstreetsedge]

As a last point, I never sell options on stocks. All my options sales are in ETFs or indexes which are fairly stable and provide decent premiums. They also are very widely traded which guarantees total liquidity.

whats the point of this one.. etf options are normally very illiquid with big spreads and small premiums. going out the money would make you peanuts vs going far out the money on a more volatile stock... heck you could make more money selling naked 450 goog puts than on most etf's