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#1
08-17-2007, 03:51 PM
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Re: Are naked calls/puts insanely +EV? What am I missing here?
[ QUOTE ]
rofl you think everyone that trades options has $100mm liquid???? pls tell me I'm misunderstanding your post [/ QUOTE ] i'll help you out a bit: [ QUOTE ] Your assertion is false for one thing. . Secondly, markets are discontinuous is the biggest risk, i.e. blowup risk. . Third, no matter how good you are at poker, you don't have NEARLY the bankroll to sell naked options. Not even close. I required my old trading clients to have > $100mm liquid to start doing those trades. Some years you make $12mm net, others you lose $4mm [or more.] It's a very rough way to make an easy living. [/ QUOTE ] NoD's old trading clients are probably not the entire market. Barron 
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#2
08-17-2007, 05:00 PM
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Re: Are naked calls/puts insanely +EV? What am I missing here?
[ QUOTE ]
[ QUOTE ] [ QUOTE ] I required my old trading clients to have > $100mm liquid to start doing those trades. [/ QUOTE ] One of the more over the top comments I have read in this forum. I can not understand the $100m threshold here. A guy writes a 50 contracts, absolute worse case, loses 100 points per net -$500,000. Why isnt $5-10 mil more than adequate?
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#3
08-18-2007, 02:46 AM
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Re: Are naked calls/puts insanely +EV? What am I missing here?
[ QUOTE ]
[ QUOTE ] [ QUOTE ] I don't know anything about options but as a guess I'd say there are some aspects of the stock that would be impossible to compute mathmatically that are priced into the options. [/ QUOTE ] The formula is only theoretical but I want to know why it's always pricing the options lower than they are trading for. [/ QUOTE ] Your assertion is false for one thing. Secondly, markets are discontinuous is the biggest risk, i.e. blowup risk. Third, no matter how good you are at poker, you don't have NEARLY the bankroll to sell naked options. Not even close. I required my old trading clients to have > $100mm liquid to start doing those trades. Some years you make $12mm net, others you lose $4mm [or more.] It's a very rough way to make an easy living. [/ QUOTE ] Please. Being naked short calls is no more deadly than selling short the common. Yes, one can lose an infinite amount of money and it happens all the time. Look at how many stocks are priced at infinity. Shorting naked puts is slightly less dangerous. I've seen a lot of stocks tank, but I haven't see one go below zero yet.
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#4
08-18-2007, 07:15 AM
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Re: Are naked calls/puts insanely +EV? What am I missing here?
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Please. Being naked short calls is no more deadly than selling short the common [/ QUOTE ] The deadly part comes with the leverage. Sometimes folks may sell a few more than they have the stomach for. Or they get into some sort of ratio position where they are long closer ins and short double the amount of further outs. Take yesterdays fed move for example. If some poor sap had call ratios on and the SPX blew through his ratio he was dead meat. And the ratio type position is very common.
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#5
08-17-2007, 11:14 AM
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Re: Are naked calls/puts insanely +EV? What am I missing here?
Read "Fooled by Randomness", by Nassim Taleb or "the Black Swan". Look up Long Term Capital Management as well.
Basically the Black-Scholes formula doesn't describe the reality of risk taking.
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#6
08-17-2007, 11:26 AM
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Re: Are naked calls/puts insanely +EV? What am I missing here?
the payoff profile of selling options is basically win win win win win win win win win win win LOSE HUUGGGEEE
you are earning a premium for selling coverage to those who want it. aside from the fat that the B-S model is woefully deficient in pricing of these options, the payoff profile itself isn't very attractive. Barron
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#7
08-17-2007, 11:58 AM
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Re: Are naked calls/puts insanely +EV? What am I missing here?
My father just bought me a copy "Fooled by Randomness" because he read it randomly and thought I would like it. I didn't realize that other people had actually read the book and actually recommended it for financial reading.
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#9
08-17-2007, 05:23 PM
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Re: Are naked calls/puts insanely +EV? What am I missing here?
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The goal of pricing options is to price them to be 0 EV. So your total EV is zero minus the transaction costs. [/ QUOTE ] Theoretically, and if you have no edge.
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#10
08-17-2007, 05:27 PM
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Re: Are naked calls/puts insanely +EV? What am I missing here?
It's hard to say what causes certain options to appear more expensive than their theoretical value without knowing how the brokerage fits their model.
My guess is that they use a constant implied volatility for all expiries and/or strikes. However, this is not true. Read up on implied volatility smile (IV smile) and implied volatility skew. Moreover, as others pointed out, option markets are fairly efficient and on average the market price you see is fairly close to the true price.
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