A simple question to the experts

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jontyxxxx

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I trade far OTM options without any protection. As far as I can see, the only stop loss I can take is to buy similar options at a lower/higher price depending on whether I am selling puts or calls. Is this flawed thinking, or is there any easier way of getting protection?

Thanks

Jonty
 
You're selling far OTM options, you mean? If you're doing that and looking for protection, you really know not what you do.

Just don't do it, that's the best way of getting protection...
 
Thats one way of getting protection! What I am more interested in is achieving certainty surrounding the maximum loss rather than effectively running a potentially unlimited risk. I know how to do this with options, albeit with significant trading costs (and often do this with puts I sell), but is there a cleverer way, or does everyone simply hedge with options or accept the risk?
 
In my view, the only people who should be selling far OTM options are ones that can accept the downside without blinking an eye. There's no clever way to do it (apart from buying further OTM options, which is going to cost). At any rate, I wrote something on this subject in another thread here...
 
as martin says you can buy further OTM's or you can hedge delta.

again his advice is correct-just don't.
 
Thanks for that guys - very useful and confirmed my thoughts on the subject. I'm a bit surprised at your strong views against selling far OTM options and seeking some protection though, surely this is sensible risk management when you could otherwise face an unlimited loss. Why do you think this is not a good strategy?
 
Thanks to those who replied. To those who tried to show their superiority but now are conspicuously absent in explaining their views, it amused me! To other readers, draw your own conclusions about the "experts" on here....................
 
hanks to those who replied. To those who tried to show their superiority but now are conspicuously absent in explaining their views, it amused me! To other readers, draw your own conclusions about the "experts" on here....................
Click to expand...

Eh? Their messages were yesterday. Do you expect people to be sitting just on your thread posting each and every day? I'm sure they have better things to do with their lives. What is the point of your thread? It seemed like you were asking a question. You received some answers and now you throw it back and say people are 'conspicuously absent' (they are not by the way, I think you don't understand what conspicuously absent means), and didn't go into detail explaining everything to you. Did you ask for each and every one of them to clarify for you? Did you explain your point of view? Thought not.

To other readers, draw your own conclusions about the "experts" on here.
Click to expand...

the only conclusion I drew was that you came to this website with an agenda, wasted people's time, and then threw your toys out of the pram.
 
Thanks - I didn't realise this was just a sort of quick " jokey " board where you just make clever comments and move on. I thoght there were knowldgeable people here - sorry I misunderstood.
 
Jontyxxxx, it depends on how far you want to take it. People can be busy, and there are a lot of questions asked every day. In my experience many people just want a quick answer and they get that. If they then pursue it a bit more, and ask why, they often then given a further explanation too. But you have to make an effort yourself.

I think people were trying to emphasise the danger in selling far OTM options. If you think they are wrong, then by all means disagree, and back yourself up 🙂 A nice debate is always good for the board.
 
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.
 
if you are concerned about the risk of a naked short put, what about selling a put spread?

if you are hurting hedge with futures.

just be aware that when (not if) you get caught, and you will as everyone that has been short options has been, you will probably do plenty of cash unless you have offset it elsewhere.

yoou evidently know more than you originally let on-your intial post sounded as if you'd found the holy grail.

when you're short way OTM options and you have to cover-you simply pay to get out of them. they can really cause big problems.
 
jontyxxxx said:
. . . 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.
Click to expand...
You've pretty much covered all the bases there tbh.
 
Indeed, jonty, given that you seem to be pretty much on top of things, I am not sure what other answers you may be seeking.

I don't think that there's a miraculously sophisticated way to cover your shorts in such a way that you are able to mitigate your losses cheaply. After all, what you're doing is selling risk premium and there's a reason why people pay you money.

The philosophical point i keep trying to make is that the business of selling insurance (which is what you're doing) differs in a profound way from the business of trading. IMHO, selling insurance while marking-to-mkt is a bad business model, which is why I suggested that you shouldn't be doing it.
 
Thanks guys and sorry if I misled you with my initial question - I appreciate your advice to "don't do it" is very sound if you are unaware of what can happen. I liked Martinghoul's comments about acting as an insurer rather than as a trader - I hadn't looked at it like that, but he is spot on and that is a very interesting thought. The ability to write naked options depends on having significant capital behind you (the increase in margin can be frightening when volatility picks up) and preferably a matching equity portfolio so effectively you write covered calls. I guess for many people it isn't therefore a possibility.

Can I ask another question? I am aware how margin is calculated (mine is calculated on London SPAN) and I have a programme from LIFFE which calculates it for individual options. However it isn't much use for multiple positions or for working out the "what if" scenario. I use a rule of thumb based on experience (which may be flawed as I have only been trading options for 2 years), but wonder what others do or whether it simply doesn't bother them because they never overtrade or have a big cushion of unutilised cash/stocks. It is very annoying to have to hold significant cash immediately available just in case! I have to say that calculating margin requirements is the one area of options I find very difficult to get to grips with. There is lots written about the greeks, clever strategies etc but very little about how margin is calculated and how it moves. It must come as a shock to many traders to be forced to close out just at the worst time because of margin calls!
 
i had to get out of a a short put posistion on bonds a few weeks ago...wasnt pretty i tell ya! sold for about 300$ each had to buy them back at about 2k each!

selling options can be very profitible but i can go very very wrong...fyi most options do expire worthless so you atleast have that on your side when you sell them!

there is no real way to calculate loss's as the options are not only priced on the underlying but the demand for the option (when you have to buy them back to get out) there is no way of calculating this future demand
 
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