BUY or SELL Options - Vote
- Thread starter TheBramble
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Re: Re: Re: Re: Re: Re: Naked Options
Robertral,please let me try to make it clearer.
You bought a thousand shares of ABC at $50 a share makes $50,000 and then you decide to sell a covered call at 50 strike for $1000,the next day the stock gaps down $10 you are now losing $10,000 minus the $1000 you received for the CC=$9000.
The deltas have nothing to do with this!Had you sold the 50 strike naked put you would be in exactly the same position.I hope this makes it clearer!
Robertral said:
Robertral,please let me try to make it clearer.
You bought a thousand shares of ABC at $50 a share makes $50,000 and then you decide to sell a covered call at 50 strike for $1000,the next day the stock gaps down $10 you are now losing $10,000 minus the $1000 you received for the CC=$9000.
The deltas have nothing to do with this!Had you sold the 50 strike naked put you would be in exactly the same position.I hope this makes it clearer!
Re: Re: Re: Re: Re: Re: Re: Naked Options
So you wouldn't adjust your underlying position for your CC if the stock went down $10?
You've given an example that as no practical implications....What is the purpose of this example?
Delta has nothing to do with it????????
johnk49 said:
So you wouldn't adjust your underlying position for your CC if the stock went down $10?
You've given an example that as no practical implications....What is the purpose of this example?
Delta has nothing to do with it????????
Re: Re: Re: Re: Re: Re: Re: Re: Naked Options
You could adjust your position in the underlying exactly the same as you could with a naked put.
Do you trade options?
What is it that you can't see?
I'm sorry if this sounds rude,but you don't have a clue what your talking about and you should not be messing about with options until you have a greater understanding of what you are doing.
If you would like to get hold of a great 305 page book(for free)just let me know it's called"Coulda Woulda Shoulda"by Charles M Cottle.Concerning covered calls vs naked puts here is an extract from the book.
THE NATURE OF A POSITION
There are three main reasons that traders lose money. First, they simply
have a wrong opinion of the market in a game where money is made and
lost based on opinions. Second, traders lose their discipline and the
patience to follow their own rules. They may have a pattern of riding
losing trades, coupled with taking profits too soon on winning trades. A
third reason can be explained by ignorance about the nature of their risk
and market nuances.
Consider this brief true story that demonstrates where risk has not
been correctly assessed:
Story: Covered-Write: A trader once came up to me on the floor
of the exchange and asked, “What do you think about selling
the 90 calls at about 9.00, and buying the stock here at about
96.00, one to one (one call for each 1oo2 (100) shares)?” His
reasoning was that if the stock stayed at current levels,
traded higher or at least stayed above 90 he would have a
profit of about 3.00 ($300) for each one to one spread. That
assumption is correct but I then asked him, "Hold that
thought to the side for a moment and instead consider, as an
alternative, selling the same quantity of 90 puts at 3.00
naked3?” He was quick to answer, “No, never, I would hate to be naked short puts!” I then showed him that the two
trades are virtually identical. Being naked short puts is very
suitable for certain investors in certain circumstances but it
seemed reasonable to assume that the trade was not for this
particular person. End
Had the trader in the example known that a covered write was like
a short put he would have realized that he himself would not do the trade.
This is where synthetics come in. It would have been a suitable trade
had the trader been willing to be short naked puts and had the financial
resources to cover the trade. However, this trader did not know, that for
all intents and purposes, a covered write4 IS a short put. A full
understanding of the consequences of a position beforehand is essential.
No matter how the position is viewed (including synthetically), the trader
should be happy with it, know approximately how long he wants to
remain in the trade, and know how he will handle it under profit and loss
scenarios.
Robertral said:
You could adjust your position in the underlying exactly the same as you could with a naked put.
Do you trade options?
What is it that you can't see?
I'm sorry if this sounds rude,but you don't have a clue what your talking about and you should not be messing about with options until you have a greater understanding of what you are doing.
If you would like to get hold of a great 305 page book(for free)just let me know it's called"Coulda Woulda Shoulda"by Charles M Cottle.Concerning covered calls vs naked puts here is an extract from the book.
THE NATURE OF A POSITION
There are three main reasons that traders lose money. First, they simply
have a wrong opinion of the market in a game where money is made and
lost based on opinions. Second, traders lose their discipline and the
patience to follow their own rules. They may have a pattern of riding
losing trades, coupled with taking profits too soon on winning trades. A
third reason can be explained by ignorance about the nature of their risk
and market nuances.
Consider this brief true story that demonstrates where risk has not
been correctly assessed:
Story: Covered-Write: A trader once came up to me on the floor
of the exchange and asked, “What do you think about selling
the 90 calls at about 9.00, and buying the stock here at about
96.00, one to one (one call for each 1oo2 (100) shares)?” His
reasoning was that if the stock stayed at current levels,
traded higher or at least stayed above 90 he would have a
profit of about 3.00 ($300) for each one to one spread. That
assumption is correct but I then asked him, "Hold that
thought to the side for a moment and instead consider, as an
alternative, selling the same quantity of 90 puts at 3.00
naked3?” He was quick to answer, “No, never, I would hate to be naked short puts!” I then showed him that the two
trades are virtually identical. Being naked short puts is very
suitable for certain investors in certain circumstances but it
seemed reasonable to assume that the trade was not for this
particular person. End
Had the trader in the example known that a covered write was like
a short put he would have realized that he himself would not do the trade.
This is where synthetics come in. It would have been a suitable trade
had the trader been willing to be short naked puts and had the financial
resources to cover the trade. However, this trader did not know, that for
all intents and purposes, a covered write4 IS a short put. A full
understanding of the consequences of a position beforehand is essential.
No matter how the position is viewed (including synthetically), the trader
should be happy with it, know approximately how long he wants to
remain in the trade, and know how he will handle it under profit and loss
scenarios.
Re: Re: Re: Re: Re: Re: Re: Re: Re: Naked Options
YOU sell you a call right? and you hedge it by buying the underlying? correct?
I am correct so far?
----> deleetd that by accident but have put it back (still getting used to this)
I agree a short put is synthetically the same as short 1 call and long underlying. What I'm saying is that I'd never be in the situation where if I was short a put and the market moved down $10 I wouldn't loose the $9
If I write a vanllia I'm going delta hedge my positon and not simply keep the stock like in your example. How are you going to make moey doing that?
johnk49 said:
YOU sell you a call right? and you hedge it by buying the underlying? correct?
I am correct so far?
----> deleetd that by accident but have put it back (still getting used to this)
I agree a short put is synthetically the same as short 1 call and long underlying. What I'm saying is that I'd never be in the situation where if I was short a put and the market moved down $10 I wouldn't loose the $9
If I write a vanllia I'm going delta hedge my positon and not simply keep the stock like in your example. How are you going to make moey doing that?
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Re: Re: Re: Re: Re: Re: Re: Re: Re: Re: Naked Options
No Robert,if you own the stock you sell a call,if you don't own the stock you sell a put.
Come on you other guys on this thread help me me out here.I'm drinking beer here and Robert's driving me crazy!!Can you explain it better than me?
Robertral said:
No Robert,if you own the stock you sell a call,if you don't own the stock you sell a put.
Come on you other guys on this thread help me me out here.I'm drinking beer here and Robert's driving me crazy!!Can you explain it better than me?
Re: Re: Re: Re: Re: Re: Re: Re: Re: Re: Re: Naked Options
hang on..what are we argueing about here?
"if you own the stock you sell a call," that is exactly the same as what I said --> "you sell a call right? and you hedge it by buying the underlying? "
johnk49 said:
hang on..what are we argueing about here?
"if you own the stock you sell a call," that is exactly the same as what I said --> "you sell a call right? and you hedge it by buying the underlying? "
Why would you want to sell a naked vanilla, even if it is a put? if your BET is wrong you will loose just on some stupid hunch. Ok you might be correct and make a lot but it's a zero sum game playing the markets like a casino!
I suspect your options strat is simply speculating on direction..am I correct?
I suspect your options strat is simply speculating on direction..am I correct?
Re: Re: Re: Re: Re: Re: Re: Re: Re: Re: Re: Re: Re: Naked Options
Look pal I write a call option and I will hedge away my risk by delta hedging it. I'm not going to simply follow your covered call example as I will loose money on the down side....do you know what delta hedging is?
So from what I understand when you write a call you don't delta hedge it?
johnk49 said:
Look pal I write a call option and I will hedge away my risk by delta hedging it. I'm not going to simply follow your covered call example as I will loose money on the down side....do you know what delta hedging is?
So from what I understand when you write a call you don't delta hedge it?
Re: Re: Re: Re: Re: Re: Re: Re: Re: Re: Re: Re: Re: Re: Re: Naked Options
I have no clue? You obviously haven't dude.....do you even know what delta heding is?
Do you even know how to price an option?
Come on prove yourself now?!?!?!?!?
Why shy away in the corner when you have heard some terms that you are not familiar with.
johnk49 said:
I have no clue? You obviously haven't dude.....do you even know what delta heding is?
Do you even know how to price an option?
Come on prove yourself now?!?!?!?!?
Why shy away in the corner when you have heard some terms that you are not familiar with.
TheBramble
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volatileN said:
So you're effectively pair trading.
But are the pairs options for different underlying instruments or more often for the same, but with different strike/expiry?
Ouch!!!
Robertral: No disrepect but I think you would benefit greatly by re-reading your books on Covered Calls and the synthetic version of a CC, which is selling a Put.
The explanations and examples offered by johnk49 are clear and concise.
The risk profiles for both strategies are identical.
References to delta hedging and Vanillas , in this instance, are pointless and irrevelent.
I expect you know exactly what your trying to say but, unfortunately, as Bill Murray might say, your words have become lost in translation . With options more than anything else people will use different terminology but mean the same thing.
Regarding being naked. Well being naked means you are not hedged by either stock or an option.
Rgds.
Robertral: No disrepect but I think you would benefit greatly by re-reading your books on Covered Calls and the synthetic version of a CC, which is selling a Put.
The explanations and examples offered by johnk49 are clear and concise.
The risk profiles for both strategies are identical.
References to delta hedging and Vanillas , in this instance, are pointless and irrevelent.
I expect you know exactly what your trying to say but, unfortunately, as Bill Murray might say, your words have become lost in translation . With options more than anything else people will use different terminology but mean the same thing.
Regarding being naked. Well being naked means you are not hedged by either stock or an option.
Rgds.
TheBramble
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Robertral & johnk49 - So, do you buy more often than sell or sell more often than buy?
...and if either of you even get close to 6 levels of nested quotes I will seriously consider taking a contract out on you both!
...and if either of you even get close to 6 levels of nested quotes I will seriously consider taking a contract out on you both!
Re: Re: Re: Re: Re: Re: Re: Re: Re: Re: Re: Re: Re: Re: Re: Re: Naked Options
I really thought that this thread would be constructive and interesting for sophisticated options traders instead, for the last couple of hours I(like a fool)I have been trying to educate this idiot Robertral about options,if this is the standard then I must say I will go back to ET!Please tell me that I am wrong and that we will get some constructive thoughts and opinions on this options thread.
Robertral said:
I really thought that this thread would be constructive and interesting for sophisticated options traders instead, for the last couple of hours I(like a fool)I have been trying to educate this idiot Robertral about options,if this is the standard then I must say I will go back to ET!Please tell me that I am wrong and that we will get some constructive thoughts and opinions on this options thread.
Marc100 said:
yes I have got lost in translation.
All I'm saying is that I would never sell a naked vanilla.
Also I think the word "vanilla" is very relevent when talking about options.
Johnk49 - Look we have got off on the wrong foot, I have "got lost in translation"...All I said was that naked options are not hedged with the underlying, and then I got into the fact that I wouln't ever sell a naked option.
TheBramble - Those type of comments are needed. You have no idea about me, this is my first day on here and I've got off to a bad start. See comment above!!!!
The fact that "most" of you seem to be simply speculating on direction using options somewhat scares me here!!!!!
Marc100 said:
Marc,thank you,thank you,thankyou.For the minute I thought I was going insane!
Ok,let's get some serious talk done about pinching all that money out there by people who are buying options!As a small contribution let me just say to all the newbies out there,if you want a good book for free about options trading go to www.cashflowheaven.com you can get the book"Coulda Woulda Shoulda"(300 pages)by Charles M Cottle.This should start you off!Next,my favourite strategies are Condor Spreads,anyone else doing them?These are sleep well at night strategies!You know exactly what your losses are and what your gains are.The great thing about options are the fact that you can manage your positions,if the position is going against in a condor spread,for instance,you can evolve into a butterfly!!
Please keep the thread going and submit your thoughts and ideas.
Guys - I think that this is the first time in the history of T2W that we have had a heated discussion on an options subject. Allelulia - This is progress! But can we please keep it civil.
I'm not certain that delta hedging is relevant to a covered call position. Delta hedging is more often used in a situation where there are multiple short positions to keep delta at or close to zero. I am open to persuasion here, but it'll need to be clearly put (pun blatently intended).
I've drawn a pay-off diagram of that compares a covered call and a short put.
Position (A) is a stock at 50 and a call with a strike of 50 sold for 1. If the price stays at 50, then the call expires worthless, the premium taken is retained and there is a profit of 1.
Position (B) is a short put with a strike price of 50, sold for a premium of 1. If the price of the stock at expiry is 50, then the put expires worthless, and the premium of 1 is all profit.
Superimposing (A) onto (B) shows that they are both the same.
With the covered call, if price tanks to 20, then there is a loss of 30 on the shares, but the call option expires worthless so the premium of 1 can be offset against teh loss and the net position is a loss of 29.
With the short put, if price tanks to 20, then the seller of the put will have the shares "put" upon him at 50 and he will only be able to sell them in the market at 20, leading to an immediate loss of 30, although he will still have the premium of 1 to offset against this, leaving a net loss of 29 (as shown in Red - the same as the covered call(Blue).
Now the psychological position between the 2 positions may be different in that the covered call holder doesn't need to take any action other than to cry gently into his beer - he has, after all, already paid 50 for the shares and is nursing his loss. The short put writer, however, will have to stump up the 50 upon expiry in the full knowledge that the shares he is acquiring for 50 are only worth 20 in the market. Of course if he doesn't have 50, then he has more than a psychological problem, and given the temptation to be over-geared, this may have led to regarding naked puts as more risky. But provided that you always have the funds (in this case - 50) set aside to buy the shares if price falls below 50, then the 2 positions are the same.
Has that helped or merely poured petrol on the flames?
BTW - the Charles Cottle free e-book is first class, and I shall add it to the reading list in the Options Trading Guide. Thanks for reminding me of this one Johnk49.
I'm not certain that delta hedging is relevant to a covered call position. Delta hedging is more often used in a situation where there are multiple short positions to keep delta at or close to zero. I am open to persuasion here, but it'll need to be clearly put (pun blatently intended).
I've drawn a pay-off diagram of that compares a covered call and a short put.
Position (A) is a stock at 50 and a call with a strike of 50 sold for 1. If the price stays at 50, then the call expires worthless, the premium taken is retained and there is a profit of 1.
Position (B) is a short put with a strike price of 50, sold for a premium of 1. If the price of the stock at expiry is 50, then the put expires worthless, and the premium of 1 is all profit.
Superimposing (A) onto (B) shows that they are both the same.
With the covered call, if price tanks to 20, then there is a loss of 30 on the shares, but the call option expires worthless so the premium of 1 can be offset against teh loss and the net position is a loss of 29.
With the short put, if price tanks to 20, then the seller of the put will have the shares "put" upon him at 50 and he will only be able to sell them in the market at 20, leading to an immediate loss of 30, although he will still have the premium of 1 to offset against this, leaving a net loss of 29 (as shown in Red - the same as the covered call(Blue).
Now the psychological position between the 2 positions may be different in that the covered call holder doesn't need to take any action other than to cry gently into his beer - he has, after all, already paid 50 for the shares and is nursing his loss. The short put writer, however, will have to stump up the 50 upon expiry in the full knowledge that the shares he is acquiring for 50 are only worth 20 in the market. Of course if he doesn't have 50, then he has more than a psychological problem, and given the temptation to be over-geared, this may have led to regarding naked puts as more risky. But provided that you always have the funds (in this case - 50) set aside to buy the shares if price falls below 50, then the 2 positions are the same.
Has that helped or merely poured petrol on the flames?
BTW - the Charles Cottle free e-book is first class, and I shall add it to the reading list in the Options Trading Guide. Thanks for reminding me of this one Johnk49.
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