How do i figure out the holds needed on naked options?

[iceman132]

t-reg, unleveraged, how do i figure out how much is to be held when selling naked options. i think they only hold on one side (i am selling calls and puts the same time). Can someone please help me, maybe give me a little example?

like if say i sold the spy 10 contracts for the 80 put and 10 contracts for the 90 calls, how much would i need and how would i figure that out?
i know its a newb question, sorry.

 

[Ponce]

Iceman

Can you tell me why you are doing this,other than to make a buck.Have you determined this is the best way to do whatever your premise might be? I have not met many options traders who do well consistently,Im sure exist.

 

[Bowball]

you need to know what your delta is. an option does not move 1:1 with the underlying. the ratio of how much the option price will move in relation to the underlying is the Delta. typically ATM options have a delta of 50 (or 50%). so if you hold FTSE 100 Index call option, and the FTSE 100 rises 10p, then your option will move by roughly 5p.

now, heres the rub - Delta is not constant. if you hold a deep OTM FTSE 100 call option then a 10p rise in the FTSE 100 might only result in an increase in your option of 1p (Delta of 10%). if you have a deeply ITM FTSE 100 call option then a rise in the FTSE 100 of 10p might result in an increase in the value of your option of 9p (90% Delta).

Delta is basically your hedge ratio. so if you sell 1 BP ATM Call option, then to be fully hedged then you would only need 500 BP shares (assuming a Delta of 50% and a contract size of 1000 shares). but the more that BP rises in value, the more the Delta increase, the more shares you need to hedge your short option position.

....and the rate at which Delta changes, given a change in the underlying is called Gamma (a second-level derivative). sounds complicated, it is. but the basics are quite simple. problem for you is that you really need to understand the basics of both of these concepts to work out your hedge ratio

 

[luckyd1976]

t-reg, unleveraged, how do i figure out how much is to be held when selling naked options. i think they only hold on one side (i am selling calls and puts the same time). Can someone please help me, maybe give me a little example?

like if say i sold the spy 10 contracts for the 80 put and 10 contracts for the 90 calls, how much would i need and how would i figure that out?
i know its a newb question, sorry.

Naked(s) Calls/Puts

(Account Value)/(Strike Price x 100) = # of Options you can write.
Now that is with no leverage and conservative.

 

[luckyd1976]

Example

$100,000 Account Value
SPY $89.09
Sell Naked Feb 09 103 Calls .SWGBY
Sell Naked Feb 09 71 Puts .SZCNS

Account Value / (Strike Price x 100) = # of Contracts

Calls Side = 100k / 10.3k = 9 Contracts
Puts Side = 100k / 7.1k = 14 Contracts