selling covered options vs uncoverd options

[goepark]

I see many post on selling covered options but what about selling uncovered options. I know that most option ex at zero. So the seller must make all the money. And a seller can sell options far out of the money with very little time.

What do you all think

[FredJones888]

look up LTCM in google. It WAS a huge hedge fund run by the people that invented the original options pricing model. They followed the strategy that you are considering. They blew up so bad the federal reserve bailed them out to prevent the entire options market from collapsing.

[adios]

Excuse me for pointing out the obvious, shorting puts has a lot different risk profile than shorting calls. In fact shorting puts has more or less the same risk profile as doing covered calls. Hypothetical situation, say a stock is trading at $50 a share calls at the $50 strike price are selling for $2 and puts at the $50 strike price are $2. The downside to shorting the puts is $48 a share and the upside is $2 a share. For covered calls the upside is $2 a a share and downside is $48 a share.

[goepark]

If you look at the oex options you will see that put options have more money in them the call options. This is becouse people that have lots of stocks buy puts and sell calls. So I say sell puts.

[FatOtt]

[ QUOTE ]

I see many post on selling covered options but what about selling uncovered options. I know that most option ex at zero. So the seller must make all the money. And a seller can sell options far out of the money with very little time.

[/ QUOTE ]

I see many people buying car insurance each year. I know that most people do not make a car insurance claim each year. So the people writing insurance must be making all the money.

This logic -->> losing money.

[goepark]

I see many people buying car insurance each year. I know that most people do not make a car insurance claim each year. So the people writing insurance must be making all the money.

This logic -->> losing money.


they make lots of money

[goodedesign]

[goepark]

You are right. I know someone who wanted to see calls on google the stock was 105 at the time. He wanted to see the 115 for 5. The stock went to 200. But the S&P 500 is a great see. You can go far out of the money.

[RollaJ]

[ QUOTE ]
I see many post on selling covered options but what about selling uncovered options. I know that most option ex at zero. So the seller must make all the money. And a seller can sell options far out of the money with very little time.

What do you all think

[/ QUOTE ]

If you are interested in this way of playing the market, check this book out

The New Options Market by Max Ansbacher /images/graemlins/grin.gif

[goepark]

I will look in to that ty

[Paluka]

[ QUOTE ]
I see many post on selling covered options but what about selling uncovered options. I know that most option ex at zero. So the seller must make all the money. And a seller can sell options far out of the money with very little time.

What do you all think

[/ QUOTE ]

You can't possibly think this is how it works right? The seller makes all the money? This is rubbish.

[goodedesign]

[Paluka]

[ QUOTE ]
did you have to go to work today?

[/ QUOTE ]

I'm a professional options trader.

[goepark]

So you buy options? How are you doing in this market it cant be easy with vol low and going lower

[Paluka]

[ QUOTE ]
So you buy options? How are you doing in this market it cant be easy with vol low and going lower

[/ QUOTE ]

I buy and sell options. I'm a market maker.

[goodedesign]

[Paluka]

[ QUOTE ]
before i began doing naked options, i couldn't STAND market makers... now, i love them.

btw.. i NEVER do market orders. sorry to ruin your day.

[/ QUOTE ]

More gibberish. Are you 14 years old?

[goodedesign]

[thwang99]

What does not having a job have to do with anything? Ad hominum argument to me.

Selling naked calls seems very dangerous, not sure how your not having a job is an argument that it's not dangerous. Have you ever been called on a naked option? I've been doing covered calls lately, and have been doing ok, also buy calls and may buy puts, but I'd never consider selling naked options.

- Tony

[goodedesign]

[Glenn]

I don't have a job. So when I say you have no idea what you are talking about does it mean more?

[Paluka]

Some people's jobs involve buying and selling options for a living. I would think that would make them more qualified to talk about this, not less.

[James282]

[ QUOTE ]
Some people's jobs involve buying and selling options for a living. I would think that would make them more qualified to talk about this, not less.

[/ QUOTE ]

These same people also use logic and consistency when they discuss things, instead of making blanket statements like "i have no job, therefore I am an expert."
I also don't have a job, but I admit that I know pretty much nothing about investing compared to most of you. I can't for the life of me understand wtf this "goodedesign" person is trying to claim.
-James

[goodedesign]

[Paluka]

[ QUOTE ]
1, i never claimed to be an expert. read the entirity of the posts.
i simply state that (in this thread) there are multiple ways to use the covered/naked calls to maximize your profit. however, paluka and others seem ti think that there must only be their way. no, try this on for size. when you know how a stock moves within reason, use naked and covered calls in tandem. converting a $X.00 move into an $X.00 * 3 move.

[/ QUOTE ]

What in the world are you talking about? The only thing that I have claimed is that you are sprouting gibberish. And stop asking me if I have a job. I am a professional trader. Most of your examples of making money off options have nothign to do with your options trades- they are examples of you making money because you got long a stock and they stock price skyrocketed. If you are able to know which stocks are going to rise dramatically in the future you don't need some fancy options strategy to make money. One of your examples that included an options trade you actually arbed yourself for a loss. You do not know what you are talking about, stop trying to mislead people.

[stoxtrader]

Paluka knows his sh!t.

trading options is a negative sum game after factoring in frictional costs. Are you better than the next guy?

[goodedesign]

[sfer]

My strategy is to buy low and sell high.

I also take out tiny classified ads.

[Mark1808]

Just because a strategy is making you money does not mean it is correct. If I flip heads 5 times in a row, this does not make me an expert coin flipper. Any rate of return over T Bills entails risk and this includes exotic option stratagies. Making excess returns selling options is greatly dependent on your ability to find options whose implied volitility is much higher than it should be. Good luck doing that when greater minds with more capital and lower trading costs than we have are beating us to the punch and efficently pricing the market. When Ed Thorpe wrote "Beat the Market" warrants were way over priced and pricing models had not yet been widely used. Selling overpriced warrants naked was therefore a wildly profitable strategy. Now finding mis-priced options is impossible for the individual investor. Options are only a tool for adjusting your risk exposure. If you are making money selling naked options that's great, but your return carries with it a commensurate risk.

[Redsox]

There are many good books that can be read about options and their pricing. I think that people here mean well, and some of the information is quite ok, but there is also a bit of "guesswork" and out and out falsehoods being told to you. Selling puts is actually far riskier. Puts do not trade higher because people buy puts and sell calls. Puts trade higher because market returns are negatively skewed, meaning that most days on the market are up days, but most large moves (e.g. more than 2 or 3 standard devs.) tend to be down moves. So market makers and specialists require increased insurance against this downward move. This is also why selling naked puts is usually riskier than selling calls. Even though stocks could in theory go as high as they want, the actual truth of market dynamics is that a large downward move (usually timed with market information such as earnings, an FDA approval, etc.) is far more likely. There are also other considerations on option pricing. Options are priced based on the dividends and interest rates applied to the underlying stock. Some stocks are "impossible to borrow" meaning that they cannot be sold short, so there is a tremendous "pump" put into the value of the put because no one wants to sell it. But the most important pricing consideration of an option is the volatility of the underlying. The more volatile a stock is, the more expensive the options are. So you can really sell some expensive puts on books like GOOG, KMRT, TASR, etc. But there is a reason for this. These stocks move dollars at a clip, and are very dangerous, even for the professionals.

Lastly, selling covered options is a bit of a misnomer. Selling a call and buying the stock is nothing more than selling a synthetic put, and selling a put and selling stock against it is nothing more than a synthetic call. Think about a position. Buy the stock and sell the call. If the stock drops, call ends up out of the money and you still control the stock after expiration. But you lose on the long stock position the whole way down, same as if you just sold the put. The situation would be different if, for instance, you already owned the stock, and were planning on holding it long term no matter what. In that case, selling the call would be ok. Market makers on the floor of America's exchanges are professionals who have been working at their "craft" for a long long time. Your money being saved for retirement is too valuable. No one ever got really rich by diversifying small amounts of money. But no one went broke that way either. Just like at a poker table, there is no "free money" in the world. My advice to you is to leave the options trading alone, and to invest in mutual funds and ETFs which are highly diversified.

Good Luck,

Eric

[Paluka]

[ QUOTE ]
There are many good books that can be read about options and their pricing. I think that people here mean well, and some of the information is quite ok, but there is also a bit of "guesswork" and out and out falsehoods being told to you. Selling puts is actually far riskier. Puts do not trade higher because people buy puts and sell calls. Puts trade higher because market returns are negatively skewed, meaning that most days on the market are up days, but most large moves (e.g. more than 2 or 3 standard devs.) tend to be down moves. So market makers and specialists require increased insurance against this downward move. This is also why selling naked puts is usually riskier than selling calls. Even though stocks could in theory go as high as they want, the actual truth of market dynamics is that a large downward move (usually timed with market information such as earnings, an FDA approval, etc.) is far more likely. There are also other considerations on option pricing. Options are priced based on the dividends and interest rates applied to the underlying stock. Some stocks are "impossible to borrow" meaning that they cannot be sold short, so there is a tremendous "pump" put into the value of the put because no one wants to sell it. But the most important pricing consideration of an option is the volatility of the underlying. The more volatile a stock is, the more expensive the options are. So you can really sell some expensive puts on books like GOOG, KMRT, TASR, etc. But there is a reason for this. These stocks move dollars at a clip, and are very dangerous, even for the professionals.

Lastly, selling covered options is a bit of a misnomer. Selling a call and buying the stock is nothing more than selling a synthetic put, and selling a put and selling stock against it is nothing more than a synthetic call. Think about a position. Buy the stock and sell the call. If the stock drops, call ends up out of the money and you still control the stock after expiration. But you lose on the long stock position the whole way down, same as if you just sold the put. The situation would be different if, for instance, you already owned the stock, and were planning on holding it long term no matter what. In that case, selling the call would be ok. Market makers on the floor of America's exchanges are professionals who have been working at their "craft" for a long long time. Your money being saved for retirement is too valuable. No one ever got really rich by diversifying small amounts of money. But no one went broke that way either. Just like at a poker table, there is no "free money" in the world. My advice to you is to leave the options trading alone, and to invest in mutual funds and ETFs which are highly diversified.

Good Luck,

Eric

[/ QUOTE ]

I see you are from Philly, do you work for SIG?

[CalRisk]

In my opinion covered options far outweigh non-covered with both risk and reward aspects. I use Bull Put Spreads and Bear Call Spreads. Go to coveredcalls.com for explanation of them. I'll briefly describe Bull Put Spreads, Bear Call Spreads are the same thing upside down. This is an example I used a few months ago:
Bull Put Spread:

First Energy Corp. (FE)
Stock Price: 40.71

Sell the OCT04 40p @ .55 (share)
Buy the OCT04 35p @ .05 (share)

.50 difference (40p sold .55 - 35p bought .05= .50)
5 held by the Brokers (price difference between the puts total possible loss is 4.50 (5 - .50 gained on the premimum)
Investing 5 we're making .50: a 10% return in one month.

When you're naked your brokerage account will hold more in margin reducing your profit points(Reward). Also you don't have a safety net(risk). But be careful whatever strategy you use.

[Redsox]

no, i don't work for susquehanna. I do trade on the floor, but for Smith Barney. I have several friends who trade for sig.

[Dan Mezick]

Probably not a good idea. You might consider Larry McMillan's books on options.

They are very good. He has a few things to say about naked options in these books.

His books are very good.

Options as a Strategic Investment by Lawrence McMillan (http://www.amazon.com/exec/obidos/tg/detail/-/0735201978/qid=1105054015/sr=8-1/ref=pd_csp_1/104-1415801-1048701?v=glance&s=books&n=507846)

[adios]

[ QUOTE ]
Selling puts is actually far riskier.

[/ QUOTE ]

What I pointed out was that max downside in shorting puts is less than in shorting calls. The probability assessment of where future prices will lie is a far different matter as you point out more or less.

What I would gather from your post that selling covered calls is a poor strategy since:

Selling covered calls == shorting a put (selling a synthetic put as you put it) for exactly the reasons you gave that selling puts is risky.

[Yads]

I'm no expert at buying/selling options. My only expertise comes from the fact that I work for a company that makes software that prices options and derivatives. However, aren't options more used to hedge other investments? Ie, you won't make a lot of money from buying options that you consider to be improperly priced, but you open yourself up to a huge loss if you're wrong. Or are people that are option traders here basically use options to bet on whether certain stocks go up or down?