**This board is designed for discussion of wealth ideas / opportunities. It is NOT investement advice and we are not investment advisors. Any information found here should be reviewed with an investement advisor before investing. Please due your own due diligence.

The thing about trading options...

By: StudioCity'98



...as you may know, is that you have to be right about 3 things...1) Price, 2) Time, and 3) Implied Volatility estimation.

First, I take no pleasure in your pain.

But listen man, if you're going to be an option seller you MUST know at the very least what kind of market environment you're operating in.  No reason you should listen to me but I've posted here several times that we're in an impulsive move down into a Bear Mrk environment.  Selling naked Puts into the teeth of ferocious Bear is a quick way to go Bust.

Second, as a matter of survival you MUST know the following:
As a someone who likes to capture Theta Decay, selling any Option at any strike greater than 30 days, when the slope of the rate of change [-dt/dx] of decay increases the fastest to $0.00 at expiry, is a sure way to go Bust given enough chances, or roll of Fair Dice.  Simple Monte Carlo simulations show this strategy goes Bust with certainty as a function of, a) Bankroll and, B) Bet Size.  It's pure math, basic undergrad Probability.

To do otherwise [selling naked options with greater than 30 days left to expiration] is analogous to betting on every hand in a Poker Game and never folding.  The strategy is a net loser over time.  This is not a matter of opinion. This is easily proven with a basic financial calculator, or options pricing software. Undergrad Stats, or Finance majors at SC can calculate this. They used to be able to anyway.  

Selling 6 months out is only going to increase how fast the strategy Busts Out. Market Makers don't price in enough premium to those options for it to be fair game.  Premiums would have to be 3x-4x what they are to compensate one for the risk to take that bet each time to make it a fair game. They're not in the business of pricing options to be fair.

I hope this makes sense to you.

And I get that you may want to own $AAPL at some price. $140 in this case.

But, please for the sake of your account solvency, disregard the price from which something has fallen. In this case $238.  That means nothing when selling naked Puts into a Bear Market.  And please disregard what a collection of analysts estimate the Price/Earning [P/E] multiple may be.  They are often, and notoriously often wrong.

The only thing certain about P/E multiples is the "P." The price is real, it's market-to-market everyday at the close.   The "E" can and does move with great frequency since it's merely an estimate.  The rapidity with which this market is falling is telling anyone listening that we're having some kind of "Denominator" event.

The Economy is slowing, and with it so will Earnings estimates change.  Ask yourself how you will feel owning $AAPL at $140 when analysts revise their earnings estimates and suddenly the P/E is not 10 or 11, but 19 or 25?


Two weeks ago when $AAPL was trading near $185 and the July $140 Put strike looked tempting at $4.00. Today $AAPL closed at $146.76 and the 140 Put is now $12.80.   You still want to own $AAPL at $140 now?  Good thing you didn't sell them 13 days ago.  You would have collected the $4.00 premium, but your margin would now be over $3.5 Million.    $14,000/$3,500,000 = .004%   Doesn't look so good now.  PLus, if you can't make the margin call then...BOOM...account liquidation.  BUST OUT  And now you owe the Options Clearing Corp a debit, which they do not ever forgive.

When you're naked long Theta, you are exposed to Vega risk, or a rise in Implied Vol.  The relationship is not linear either, it's geometric.  Your Theta premium is fixed, but your Vega risk rises exponentially as the market gets closer to your strike price...ESPECIALLY with this much time left.

This is why it vital that you understand that within the last 30 days, more like 25 days of life left in the Option...that Theta decays at such a rate that it almost immunizes you from Vega risk.  If you value your trading account and want to stay in the game...NEVER EVER SELL ANYTHING NAKED WITH MORE THAN 25 DAYS  OF LIFE LEFT.


Overall the greater idea is there are far easier and less risky ways to capture Option Theta Decay than selling naked.

Good Luck.  And Merry Christmas!

Post Please Log in OR Register for an account before posting.