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Guy,
as a professional option trader, I would concur with Ed in that I believe a
simple outright purchase of puts is probably the best strategy here. Risk is
limited, profit potential is unlimited, and there is no margin. And, as Ed
points out, time decay, though not on your side, could be kept minimal by
purchasing slightly longer term options.
A sale of naked options would probably greatly impair, if not annihilate,
the success of your trading system. As I understand it, the system makes up
for rare, but substantial, losses by raking in large profits 4 out of 5
trades. If that is the case, selling naked options leaves losses unprotected
(they remain the same size as before with futures), whilst minimizing
profits to the premium received. The pain's still the same, the rewards
aren't.
As regards the diagonal credit spreads Ed mentioned, this is a different
animal again. Profits and losses are both limited (though potential loss is
considerably greater than potential profit), and, to comment on Ed's
example, about a 25 pt. move of the market (down) would be required to at
least reach breakeven. If you expect a 50 pt. move within a week or so, and
if it does occur, then that position would be at its best. More of a move
would result in somewhat less profits again.
Kind regards,
Michael
PS. Just read Moshe's post. Words of wisdom, to be heeded by any aspiring
option seller, IMHO.
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