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Stuart,
I've been hammered writing naked calls (silver in Jan), so I'm not sure
they're much safer than the puts. I managed to buy them back at a loss of
$20,000 and if I'd hesitated even one more minute, it would have been much
worse; my buyback bids were filled seconds before another BIG push up.
Expensive lesson in not believing that a market will adhere to ones
projections (as man thinketh, the markets will not do). So be careful!
Best of luck,
Dennis C.
dconn@xxxxxxxxx
-----Original Message-----
From: Stuart Hazlewood <shazlewood@xxxxxxxxxx>
To: RealTraders Discussion Group <realtraders@xxxxxxxxxxxxxx>
Date: Monday, July 20, 1998 1:17 PM
Subject: Re: Option Strategy
>Doc:
>
>You're absolutely right and I wiull NEVER sell a naked put. I used to have
an account managed by Larry MacMillen who lost $25k in one trade selling 11
naked S&P strangles. I closed it down after that trade.
>
>HOWEVER ... I think there is merit in selling naked calls at 1 sigma out of
the money (sigma based on Implied Volaitility). The reasoning is: ...
>
>- the market moves more slowly top the upside
>- a move to the upside will reduce the Implied Volatility of options
>- you can measure the strength of the upside move in sigma terms. If the
daily move exceeds the sigma boundarty by too much (let's say a 2 sigma
move) you can close the trade out for minimal losses.
>
>With all the Elliott Wavers calling for a top this week or next,
particularly Robert Miner whom I respect a lot, I may well sell some calls
at 1 sigma out of the money.
>
>What do you think?
>
>- Stuart
>
>>>> THE DOCTOR <droex@xxxxxxxxxxxx> 07/20 12:20 PM >>>
>The analysis is fundamentally correct, but unweighted. You have to examine
what you lose the 10% of the time that the vol is wrong.
>
>If a strategy made you money 90% of the time would that be enough?
>
>Let's say the same strategy would bankrupt you 2% of the time...same
strategy.
>
>Stuart Hazlewood wrote:
>
>> I just finished reading a book by someone called K. Anand containing some
rudimentary option strategies (backspreads, naked strangles, hedged with a
long straddle when IV falls, etc.)
>>
>> The news in it was the following: according to the author Implied
Volatility provides the real range for the market over any given time
period. Thus you take the at the money IV for let's say the S&P and project
the market range based on this number. For example, assume the following:
>>
>> Sept S&P is @ 1200
>> At the Money IV = 15%
>> Days to expiration (August) = 32
>>
>> Expected movement = sqr root (32/365) * 1200 * .15 = 53
>> Expected range at expiration = 1147 to 1253
>>
>> The real news is that, according to Anand, this range has held true
historically 90% of the time. He therefore recommends strategies that are
short at 1 sigma based on the at the money IV.
>>
>> Since I have not been able to find a database of at the money IV for the
S&P, I have not been able to back test the theory. Any comments?
>>
>
>
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