Exiting a naked put write that is going against you...

[Mr. Lynch]

Hello Everyone,

With part of my portfolio I write naked puts as part of a monthly income producing strategy. I am struggling with exits and hoping someone may be able to offer some advice. Typically I enter the trade after determining a neutral to upward trend and use time value to my advantage in order to turn a profit.

Ideally, the trade expires worthless and I keep the entire premium. I'm having difficulty determining when I should exit when the stock reverses trend and begins to go against me. I am not comfortable using stops with this strategy as too many times in the past I have been stopped out when a few days later I could have managed the trade better (stock rebounds, etc.)

Any thoughts on how to manage put writes when your nearing expiration and things aren't as "sunny" as you'd like?

Thx!

 

[GammaJammer]

You're short gamma, which isn't ideal in a rangey market, as if you want to stay delta neutral you end up buying high and selling low.

 

[Martinghoul]

My Z$2c...

I am not a fan of selling gamma. In my view, the 'picking pennies in front of a bulldozer' adage definitely rings true. This is especially true if your transaction costs are significant, which would make effective delta-hedging even more difficult.

So, while everything depends on the exact situation and the reasoning you used to get into the short gamma trade, one of the ways I have found that works for me is to buy a further OTM put. Thus, you will turn your naked put short into being short a put spread, where your downside is capped. But let me emphasize again that everything is about the rationale of the original trade and the exact conditions that you're facing.

 

[GammaJammer]

I think the problem in this exact case isn't buying or selling options per se - it's the trading of them naked, at which point they behave in some ways just like a leveraged position in the underlying. Thtsi really isn't how the pros trade opts. For a start they are primarily trading vol, and will look to hedge out, or at least manage / take a view on the other greeks.

Not directed at you btw Martin - just for the purposes of this thread.

 

[Martinghoul]

No probs, GJ, and I agree with you, hence the many caveats/provisos in my post.

I think, generally, there are only two ways to trade options and the main difference is whether you mark your position to mkt (equates to looking at your live P&L, in the more mundane sense) or not. If you do care about your live P&L, you shouldn't be selling naked puts, in my view, but rather should be playing the various games GJ had alluded to. If you are able to not care about your running P&L, then by selling options you're, effectively, in the insurance biz. Then you sell, make some provisions for potential losses, close your eyes and hope for the best. It looks like you want the best of both worlds, but, unfortunately, it just doesn't work like that.

 

[Jemima]

That is what brought AIG down - Marking to market of their CDS book, which they considered "insurance".

 

[Martinghoul]

That is what brought AIG down - Marking to market of their CDS book, which they considered "insurance".

While I don't think it's quite that simple, I do believe part of the problem was that they tried to adopt a business model that turned out to be some sort of an unhealthy hybrid...

 

[gooseman]

sell a teeny buy a lamborghini.

 

[GammaJammer]

Ok now I'm looking for clarification. Is this some sort of repugnant people trafficking recommendation goose? Or am I off base as usual?

 

[gooseman]

teenies-deep OTM calls/puts.

the reverse of taleb.

 

[GammaJammer]

Ah

Alles Klar Jetzt

 

[Mr. Lynch]

OK, thanks for everyone's input. So far I've heard I'm short gamma, shouldn't be trading naked puts, and something about a teeny that has me oddly disturbed. I've had a fair bit of success trading this strategy (though will most likely do more spreading in the future). Any particular advice on how to manage these types of trades?

Thanks!

 

[Martinghoul]

If you insist of doing it, but can't stomach the pain, I gave you a suggestion that should work (buy deeper OTM puts; at the strike where you know you would have had enough).

 

[Mr. Lynch]

Thanks Martinghoul! I believe I will be better off spreading in the future. Appreciate it...

 

[Martinghoul]

No problem... Don't take my word for it, though. Think about the various scenarios (not just at expiry, mind you), draw some payoff diagrams and see what suits you best. It's really all about your particular situation and you should examine any recommendations/advice critically.

 

[GammaJammer]

1X3s - short the wings, death or glory

 

[gooseman]

read black swan by taleb. he runs/ran a hedge fund on the reverse scenario on the premise that he won't mind negative returns some years as tails tend to be fat and more oftne than anticipated and return bigger amounts.

 

[Martinghoul]

Oh, no, not Taleb again...

 

[gooseman]

persoanlly i dislike the guy and disagree with his reasonings but it's always good to understand another point of view. long of himself would be a very good description.