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Keep in mind, Vic Niederhoffer bankrupted his hedge fund in 1997 when his
naked S&P put options went thru the roof in one nasty day. With naked
options as Vic has taught us, the risk is unlimited.
With credit spreads as Ira has so well explained, there are two problems:
1) increase cost of initiating the position relative to naked-only options
2) very expensive to unwind the complete position.....
although you can unwind the short side of the position and keep the long
side exposed which is normally not a good idea if the market's move begins
to reverse.
Credit spreads have an "automatic" stop loss built in which is nice, but
usually the risk/reward ratio is poor for them....usually 4:1 meaning you
can "win" $2500 on the position at the risk of $10,000.
More important: Why are these strategies fairly reliable ?
High win percentage....
some gurus saying 90+% for the best combination of strikes......
my experience shows that 75% is more like it.
> -----Original Message-----
> From: John Cappello [mailto:jvc689@xxxxxxx]
> Sent: Thursday, September 26, 2002 10:52 AM
> To: ira; realtraders@xxxxxxxxxxxxxxx
> Subject: [RT] Interesting Puts
>
>
> Thanks Ira,
>
> I think I get it now.
>
> John
>
>
>
> ------------------ Reply Separator --------------------
> Originally From: "ira" <mr.ira@xxxxxxxxxxxxx>
> Subject: Re: [RT] Interesting Puts
> Date: 09/26/2002 07:35am
>
>
> If you sell the 25 put you buy the 20 put or the 17 1/2 put that
> limits the
> risk. Not only is the risk reduced, so is the margin requirement.
> The
> profit is also reduced, but then again you can sell more spreads for
> the
> same margin as one naked option and net the same amount of money.
> The key
> is the risk. At $20 you know what your risk is. It is $20 less the
> option
> premium taken in. If you can afford to buy the stock you can afford
> the
> loss on the option. If you feel that you want to own the stock then
> why not
> buy a 2 year leap and just trade the stock short against the leap.
> Each time
> you get a sell signal, short the stock. When you cover the short
> stock you
> are automatically long with the leap. You can adjust your deltas any
> way
> you would like. The nice thing is that you are always in a position
> of
> limited, defined risk.
>
>
> ----- Original Message -----
> From: "John Cappello" <jvc689@xxxxxxx>
> To: "M. Simms" <prosys@xxxxxxxxxxxxxxxx>;
> <realtraders@xxxxxxxxxxxxxxx>
> Sent: Wednesday, September 25, 2002 8:33 PM
> Subject: [RT] Interesting Puts
>
>
> >
> > For my own and possibly others, how does one convert the sale of a
> > put to a credit spread.
> >
> > John
> >
> >
> > ------------------ Reply Separator --------------------
> > Originally From: "M. Simms" <prosys@xxxxxxxxxxxxxxxx>
> > Subject: RE: [RT] Interesting Puts
> > Date: 09/25/2002 11:14pm
> >
> >
> > All you have to do is convert the naked position to a credit spread
> > position.....
> > it's easy.
> > but greedy people (like Vic Niederhoffer) don't do it....it reduces
> > profits.
> >
> >
> > > -----Original Message-----
> > > From: ira [mailto:mr.ira@xxxxxxxxxxxxx]
> > > Sent: Wednesday, September 25, 2002 8:14 PM
> > > To: realtraders@xxxxxxxxxxxxxxx
> > > Subject: Re: [RT] Interesting Puts
> > >
> > >
> > > Selling naked options can be very risky. There are many other
> > > ways to trade
> > > with the same or better profit potential and have limited risk.
> > > As a market
> > > maker and as a trader, I have always abided by one rule. " Never
> > be short
> > > more options then you are long" That rule stood me in good stead
> > until I
> > > retired and in the 18 years thereafter. Ira
> > > ----- Original Message -----
> > > From: "John Cappello" <jvc689@xxxxxxx>
> > > To: <realtraders@xxxxxxxxxxxxxxx>
> > > Cc: <MedianLine@xxxxxxxxxxxxxxx>
> > > Sent: Wednesday, September 25, 2002 12:44 PM
> > > Subject: [RT] Interesting Puts
> > >
> > >
> > > >
> > > > Yesterday I sold Dec. puts on GE with a strike price of 22.50.
> > Nice
> > > > premium.
> > > >
> > > > Today, before market rise I sold Dec. puts on JPM with a strike
> > price
> > > > of 15.00. Nice premium.
> > > >
> > > > My concept is that if the strike prices were hit I would not
> mind
> > > > owning the stocks at those prices. If not struck I keep the
> > premium.
> > > >
> > > > I had previously sold Sept calls on GE with a strike price of
> > 35.00.
> > > > Premium became mine when options expired.
> > > >
> > > > I am looking for other ideas that have value along these lines.
> > > >
> > > > John
> > > >
> > > >
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> > > >
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> >
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