Thanks Calinor. I am very conscious of the significant risks in selling far OTM options and hence my original question about reducing risk. I have consistently made very good profits by following this strategy although for a long time I would never sell a naked put but always buy some protection below. I now sell a maximum of 10 naked puts each month and of course were the worst to happen I could experience a significant loss, albeit I stress test that the effect of a 1,500 point fall in the FTSE in one week won't cause me to be wiped out. Clearly if the market started to fall sharply I would a) maybe close out, b) maybe sell more calls c) maybe ride it out c) maybe roll the positions or maybe buy protective ATM puts (of course a lot depends on how much my margin increases as this may force my hand). All depends on time to expiry and positions in other months etc.. What particularly interested me was how others dealt with reducing risk in this situation. As you will appreciate the answer , "just don't do it" wasn't really what I was looking for. I expect that there is no clever way to hedge the risk by say, using futures, but there may be something I am missing and I am always prepared to learn.
A nice debate is always good for the board.
