Selling Naked Calls?

My goodness. Where did all that come from? I was just wondering whether selling a general category of naked options, such as out of the money calls, (getting no special price break) has shown a long run profit. Just like I might have asked whether betting every bowl game dog has. It was not a theoretical question and certainly had nothing to do with utility or other investment alternatives. When I said some of our readers might know the answer I didn't mean they would because they are smart. Rather I assumed that someone has historically checked out this system on paper, published the results, and that the results were read by someone on this forum who could tell us about them.

I find this thread amusing.I and many of my friends have long term(over 15 years) winning records trading options.Most of us do not use any fixed system. Sometimes we sell naked options!

You seem to be looking for that magic "black

box" system.Forget about it!FridayI made a recommendation in the bond options.No analysis

was needed.I said I had bot feb 98 puts in the bonds and sold feb 97 puts in the bonds.For each 98 put I sold 2 97s.I did this at 12 credit and said they were still a sale at 5 credit.This is a delta long trade and the bond market was down on friday and yet this trade still made money.Think about it.A computer would have told you with the market settling 10 ticks lower on friday this trade should have lost money..but it picked up a few ticks.As a matter of fact the 98 put was down 1 tick and the 97 puts were down 2 ticks!the trade settled at 2 credit from the previous days 5 credit.

1) It may not be impossible to check out this system on paper, but that hasn't stopped almost every academic or paper study of the problem from being misleading if not worthless. Paper studies of options are notorious for their very "paperness," much more so than bowl games. Not only are there more execution complications, but there are more people doing studies!


2) I am very touchy about the idea that, by "curve-fitting" a strategy - finding a set of inputs which would have yielded a theoretical profit in the past (and choosing from a sufficiently large pool of candidate inputs that such a strategy will certainly be found) - suggests anything about the price of options, or about the future profitability of the strategy, or even answers your question!


So, if you want the simple answer to your question, yes, in the early 90's I did your study using 12 years of Wall Street Journals which I bought from a guy in Hayward CA, so that I could figure in news stories to see if they helped advertise the jackpot illusion. I had recently finished writing a "complex expectations" options-pricing program for Windows and, to my surprise, it seemed to suggest that most options were over-priced! So I was curious was it garbage-in-garbage-out, or could I make a profit, so I did the study.


The study confirmed that a study will often show that calls are over-priced. And what I'm telling you is that anybody who answers your question is silly!


But I'm also taking it a step further. The correct thing to study is not the behavior of options prices, but the behavior of people who perform studies, and who in turn create options prices with their transactions!


There have been many academics who came to Wall Street armed with studies. Milken used Braddock Hickman's "Corporate Bond Quality and Investor Experience, 1900-1950" - as a sales tool if nothing else - and made a fortune. David Askin used his own studies of experience with difficult-to-price mortage-backed securities and got killed.


I guess the bottom line is that the stock market is an out-of-control knowledge-production machine. Charts are like Rorschach charts, you can see in them whatever you want, and then write the word KNOW in capital letters.


And I can't stand to watch people learn nonsense!


It irritates me if someone writes an article in a newspaper advising investors to always use limit orders, or someone writes a post saying you can make money selling calls, or if someone says you can buy and hold stocks and you will make money!


In reality, stock-market knowledge is generally wrong as soon as it is produced. So if I simply say, "look what people have learned to do and do the opposite" I will also be misleading. The question is, how fast do people evolve to do one thing and, once they have, how long will they continue losing money before the opportunity vanishes?


leroy

You are correct sir! Also when you sell a naked option you should have a sense of what you will do if you are wrong and when you will do it.This is not always possible however and I have a good example.Last year the price of natural gas ran up from 4 units till over 9 units in a short time.

California was having brown outs and there was talk of storms in the Atlantic near the gas fields.The "analysts" were calling for MUCH

higher prices.I looked at the 20.00 unit call that expired in approx 5 weeks.They were trading for 1,800.00 each.I sold a few and waited to see

what the futures were going to do.A week later

the futures were trading at 10 units and yet those same options were offered at 150.00 each!

There was no way to hedge the options I sold effectively.They were lotto tickets.They had priced in the end of the world!I just thought they were a sale and it takes a lot for me to just sell options naked.

Usign Bayes theorem we can show that, even though people who win in poker or sports betting are infinitely more likely to bet or play again than people who lose, that there are so many people gambling on the weekend and earning a paycheck during the week, that survival rates don't substantially change the texture of sports betting or poker. Or if they do, at least the texture change operates slowly and steadily in one direction over a period of years, rather than being complex or cyclical.


In most stock-market situations, the current pool of players is not mostly newcomers, but a large percentage of people who have survived previous or recent rounds. Add to that the different nature of a football bet where your bets don't affect the skill of the players, and the stock market where the bets actually change the supply and demand and cause the outcome, and you find there is almost nothing more dangerous than stock-market "knowledge!"


So that is why I came back at your question with an incomprehensible gobbledygook. Because that is what people are in for if they start down that path.


eLROY