Selling Naked Calls?

>>Add that to the fact that there are experts out there with big money who can easily afford the risks on both sides. Doesn't it stand to reason that they will drive down the price of an overpriced option? >Obviously if it is true that selling naked options is a bad play it would be because of the rare calamity that would befall the naked seller. >But because of its rarity, meaning that the great majority of naked sales show a profit, might it not be that this widespread belief that selling naked options is positive EV, is in fact wrong? > I believe we have readers out there who KNOW the right answer to this question and I hope they tell us.

...Add that to the fact that there are experts out there with big money who can easily afford the risks on both sides. Doesn't it stand to reason that they will drive down the price of an overpriced option?...


Of course this is true for a lot of stocks but as Ray has pointed out many times that the big money stays out some stocks basically because there isn't enough liquidity. I suppose that some opportunities may present themselves because of this.


...Obviously if it is true that selling naked options is a bad play it would be because of the rare calamity that would befall the naked seller. ...


IMO there is a big difference between shorting puts and shorting calls so I assume we're talking about shorting calls.


...But because of its rarity, meaning that the great majority of naked sales show a profit, might it not be that this widespread belief that selling naked options is positive EV, is in fact wrong?...


FWIW I don't think in general that shorting calls is +EV. I don't think options are priced that way and from my understanding market makers generally don't assume the risk of a short call, they transfer the risk and are basically involved in an arbitrage activity for lack of a better term.


...I believe we have readers out there who KNOW the right answer to this question and I hope they tell us. ...


I really don't know of any particular study but I'll try and find one. I can't prove it but I actually believe that right now there are many under priced out of the money calls in several of the big cap NASDAQ tech stocks. Again I can't prove it but I think buying slightly out of the money calls will be profitable for 2002. If I was employing such a strategy I'd go long the calls for the next month the day the previous month's options expired and buy them each month expecting to lose more often than I win but when I win it would more than make up for the losses.

>IMO there is a big difference between shorting puts and

> shorting calls so I assume we're talking about shorting calls.


Please don't make this common blunder.


There's little difference in the results

of being short massive positions

in low price Calls or in low price Puts.


Almost half the traders mentioned went,

one way or another,

on October 19, 1987.

I believe you Erin.For the 3 quarters prior to the crash my friends and I talked about pooling about 15k together to buy S&P puts.We felt the market was overvalued and we were going to buy a bunch each quarter.Woulda,shoulda,coulda, we never did.We did sell some way out of the money calls at ridiculous prices after the crash however.

You know, that average floor-piker who lost 52.5 million in two days? (CBOE, OEX puts.)


I think Tom's blunder may be more accurate when applied to off-floor/retail traders. Floor traders often get wrecked by fast moves and gaps, which happened plenty to the upside in CitiCorp, Chrylser(?), other buyouts, and throughout the Internet era.


But for off-floor traders, usually any big move over time is a gap - since they don't hedge dynaimically - and they are usually net long the market. Since they post monster margins, the move of a size required to blow them out would have to be some surprise negative revelation about a company.


When we talk about stocks shooting to the moon, and covered call writers and mutual-fund investors, usually it feels more like oxygen than the Option Grim Reaper.


Also, it may very well be that bond options have a lot of volatility because people have a long memory going back to 1982, and the absolute Keynesian/Argentina doomsday scenario.


eLROY