Are naked calls/puts insanely +EV? What am I missing here?

[crazy canuck]

[ QUOTE ]

What do you mean by true price if you mean something other than market price?

[/ QUOTE ]

By true price, I did not mean theoretical price....I meant fair value. Sometimes there are inefficiencies in the options markets too, so the market price is not the true price. However, on average it is very hard to beat the option markets, so market price is fair price.

[pig4bill]

[ 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.

[pig4bill]

[ QUOTE ]
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.

[/ QUOTE ]

No they aren't. Most options are very thinly traded compared to stocks. People buy them for many different reasons. For insurance, to hedge, for speculation. People are not always that concerned about getting the perfect price.

[mrbaseball]

[ QUOTE ]
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.

[mrbaseball]

[ QUOTE ]
For example "QQQUP", a sept put option on nasdaq is trading at .58, and the theoretical value is .13. I understand naked calls/puts are insanely risky, but this seems like they are also ridiculously +EV. What am I missing here?


[/ QUOTE ]

We are currently in a volatility spike. When that happens all options go up due to fear and uncertainty. This "probably" is a good time to be looking at selling options. Not naked but for juicing the bottom line.

See a stock you want to buy? Sell the put instead and hope you get excersized. The risk is the stock rockets and you miss getting long it. But at least you keep the premium. The other risk is it tanks and you are stuck with it. But if you really wanted to buy it anyway at least you bought it better due to the premium.

Long in the portfolio? Excellent time to sell covered calls. Risk here is blowing through your short call making you sell prematurely but you still got the premium plus the gain until the strike if it was out of the money. Downside risk is having the stock crap out but if you wanted to be long it anyway at least you get the premium again. And if you want to puke it you have to probably pay up to puke the options as well.

The returns on these kinds of strategies is currently very appealing but you have to understand the risks.

[AvivaSimplex]

IMO buying and selling options on individual stocks is -EV for nearly everyone but the market makers. The bid/ask spreads are far too large on all but the very biggest stocks. You give away 10%+ just getting into and out of your positions. Plus commissions are higher, which adds another 5% onto a $1000 position.

[pig4bill]

[ QUOTE ]
[ QUOTE ]
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.

[/ QUOTE ]

Yeah, you have to be careful in what you are doing. If you would normally do 1000 shares you shouldn't be doing 30 contracts. But you don't need a hundred million dollars in order to be careful.

[NajdorfDefense]

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
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.

[/ QUOTE ]

Yeah, you have to be careful in what you are doing. If you would normally do 1000 shares you shouldn't be doing 30 contracts. But you don't need a hundred million dollars in order to be careful.

[/ QUOTE ]

But I guarantee you someone on this forum will short 10 OTM calls of Apple or whatever and take in their $750, and the stock will run up 20+ points on them and they'll be very unhappy and out $20k, because they thought they understood the risk when they had no idea whatsoever.

RIMM ran up $23 yesterday alone. But of course, you're a big boy and can do whatever you want. Teach those market-makers a lesson and grab all the +EV you can!

[pig4bill]

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
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.

[/ QUOTE ]

Yeah, you have to be careful in what you are doing. If you would normally do 1000 shares you shouldn't be doing 30 contracts. But you don't need a hundred million dollars in order to be careful.

[/ QUOTE ]

But I guarantee you someone on this forum will short 10 OTM calls of Apple or whatever and take in their $750, and the stock will run up 20+ points on them and they'll be very unhappy and out $20k, because they thought they understood the risk when they had no idea whatsoever.

RIMM ran up $23 yesterday alone. But of course, you're a big boy and can do whatever you want. Teach those market-makers a lesson and grab all the +EV you can!

[/ QUOTE ]

So you're implying the only people that can trade RIMM have a hundred million bucks. I know guys that can trade RIMM on a day like that, from the short side only, and make decent money. They have somewhat less than a hundred million.