Trading options: All things Calls and Puts (1 Viewer)

[pecorino]

Been meaning to start this topic for a while. I’ve been trading options for about a year—learned a lot but a long way to go. I’ll start where most options traders start, writing covered calls, and then see if this thread gets any traction. This is not meant to be Options 101 as that can be found all over the net. Looking for strategies, stories, pitfalls to avoid, etc.

I have soured on selling covered calls lately after losing out on two big gainers and also when wanting to sell 100 shares that did not get called away and so I’m stuck with an underperforming holding. But they have their place in a traders arsenal. An example of how I’m using them right now:

I’m looking to write a covered call on an equity that I may have just picked up at a bargain price and I’m looking to sell quickly, let’s say for a 5% gain, but that I wouldn’t mind holding longer. MSFT is a good example. Bought it at 100. Sold a covered call with strike of $105, netted $150 on the option. Whether it gets called away or not, I’m happy (unless it tanks or spikes), if I pick up a dividend even better. But I find the sweet spot for trading covered calls to be quite small (there are only so many Microsoft’s out there) so I’ve moved on to spreads much more lately.

 

[AAABatteries]

TURN THOSE MACHINES BACK ON!!!!

This will be my only contribution to the thread as I’m clueless when it comes to the market.

 

[Shula-holic]

When I was a more active trader I frequently sold puts on stocks I liked in what I perceived to be a down market.  That way I collected a premium for having a holding "put" to me that I wanted to own.

 

[pecorino]

When I was a more active trader I frequently sold puts on stocks I liked in what I perceived to be a down market.  That way I collected a premium for having a holding "put" to me that I wanted to own.

I had been selling puts a lot but stopped when the first signs of a correction appeared. I’ll definitely add a post later about selling puts and put spreads, and how they can actually provide income.

 

[culdeus]

Every time I dip my toes in it just seems like you net pennies on the dollar for time involved.  

 

[pecorino]

Every time I dip my toes in it just seems like you net pennies on the dollar for time involved.  

I find options to be very "swingy." When I sell covered calls, yes, pennies on the dollar, and often losing out on a big gain. That's the main reason I've soured on them. But at the same time, it's a conservative play and feels like there is a place in my portfolio for selling calls. On the flip side, buying out-of-the-money calls are akin to lottery tickets. Getting a return of 10X or even 20X on an initial outlay is not out of the question, even on a short term play. For instance, Netflix is going to report earnings soon and the version of me from six months ago would be tempted to buy puts that are about 10% out of the money. Currently trading at $355, that would be a put with a strike of about $320 which is costing about $330 (expiry on 1/18). It is conceivable, although unlikely, that NFLX could drop 15% on earnings which would leave it around $300 per share, netting a profit of almost $1700. That's a 5-bagger in less that one week, and of course a bigger drop, like what Facebook did last earnings, just grows that multiple.

It becomes a question of probability--how likely is it that NFLX will fall that much on earnings? If that answer is 1 in 100, then buying an option is a bad play. If it is one in three, then jump in. Instead, I've been buying in-the-money calls which I'll explain in a future post, and I've been selling puts which also falls into the category of 'pennies on the dollar' but I've grown to like them more than selling calls, which I will explain momentarily.

 

[pecorino]

I heard today about a trader who sold SPY puts for 2020 to the tune of 175+ million dollars. That's a nice chunk of change, even if you need 5 Billion on collateral (or on margin). I did not catch the details when it aired on CNBC, but if the SPY stays above the strike price of that put, the trader keeps the $175 million but if it tanks, he could be out 5 large. Very large.

Selling puts has become my favorite options trading strategy for one simple reason: I used to buy stocks using limit orders (if ticker XYZ hits a certain price then go ahead and buy 100 shares). Now, instead, I can sell a put at that particular limit price and if it hits, I get to buy the stock at that price as I would have anyway. If it does not hit that price, I don't buy the 100 shares. But either way, I collect a premium. For instance, I like IQ and wanted to buy it at $20 per share when it was trading at $22 per share. I sell a put and net about $150 which goes right into my account. The expiration comes, the stock is trading below $20, so I buy it at $20. Granted, it is now worth less than $17 per share so I am down on that particular purchase. But by selling the put instead of buying 100 shares outright, my cost basis is at $18.50 per share, easing that pain a bit.

A couple other nice features of selling puts: if the stock pops, you can close out the position by buying back the put and net the profit. Rinse and repeat. You can also sell a put on a company that you don't even intend to buy, if you want to make a bullish bet (or if you think the stock price will move sideways). You make money on selling puts if the stock goes up, goes nowhere, or even if it goes down so long as it doesn't break the strike price.

I am convinced that selling puts is a viable strategy to produce income in retirement. You need to either have a big pot of money or a margin account to be able to leverage the collateral into a decent gain, kind of like the big bet on the SPY where $5 billion in assets gets you $175 million in premium. Given a chunk of principal to play with in retirement, I'm confident that I could net 10% annually by selling puts. In combination with dividends and social security, selling puts can be an important part of income generation in that phase of life.

 

[culdeus]

Selling puts naked is a great if you have a window at the ready to jump out of. 

 

[kliph]

I would love to contribute to this post, but, totally ignorant!  Any good references for understanding calls and puts?  I know the internet (and Google) are full of suggestions, just wondering what you thought would be a good place to look.

Thanks!

 

[pecorino]

Selling puts naked is a great if you have a window at the ready to jump out of. 

I don’t recommend that. You need to cover yourself with principal. Or find a nice window.

 

[Sand]

I don’t recommend that. You need to cover yourself with principal. 

All is well until you own PG&E.  Your risk profile has significant downside.

At least it's better than selling calls.  Good story - read this about the optionsellers.com mushroom cloud.  Out left them not just broke but debt calls going out to clients for millions.  So ridiculously bad trading practice on display there.  

 

[pecorino]

All is well until you own PG&E.  Your risk profile has significant downside.

At least it's better than selling calls.  Good story - read this about the optionsellers.com mushroom cloud.  Out left them not just broke but debt calls going out to clients for millions.  So ridiculously bad trading practice on display there.  

Good read, thanks. Naked options are for the foolhardy. All he needed to do was to write a call spread (instead of leaving the sold calls naked) and he would have bought himself very cheap insurance.

One point in the article that I disagree with is their claim that you should not sell options because the reward vs. risk is too low but instead should buy options. As mentioned above, buying options is a great tool for your toolbox and provides incredible leverage. But it’s all about probabilities so buying a cheap but highly improbable call is unwise. Just as it is to pick up pennies by selling puts. You need a rule of thumb for selling puts or covered calls: I want to be making 5% minimum on a premium given a one month time horizon. So looking at IQ, a put with strike of 20 was netting $150 premium in under one month, requiring $2000 in collateral. That’s 7.5% so I’ll take it. Selling calls is less lucrative but safer. I’m not finding as many covered calls to be worth doing lately, what with volatility way up.

 

[siffoin]

I think dicking around to make small profits with options is a complete waste of time.  I wrote about the futility of writing covered calls back in early December in the stock thread when folks were wanting to write CC's on AAPL with it trading around $175, and them thinking how that was going to positively impact their cost basis.  NO!  Opening a Covered Call Position in a down-trending stock is a bad idea.

Options is all about understanding risk and utilizing that to your advantage.  Owning the risk (buying a Call or Put)  might mean the odds of a payoff are lower vs Writing a Call or Put.  But done strategically, the tool can be utilized to really maximize gains on both up and down trending stocks.  One needs to be agnostic towards the stock however...and look at the tool of options for profit potential.  Sometimes this risk is worth it...most of the times it isn't.  The manager who blew up his clients accounts by writing naked puts on natural gas is a perfect example of how not fully understanding the risk that makes options dangerous.  Options can be used in almost limitless ways...and again I want to re-emphasize that any of the strategies can be done with risk well managed.  But the key to fully grasp is: What is the risk?  What is the Reward?

If interested I could offer an example.

 

[tommyboy]

https://www.tampabay.com/business/lawsuit-seeks-95-million-for-clients-of-a-tampa-firm-that-lost-all-of-their-money-in-an-options-trading-catastrophe-20190115/

 

[pecorino]

I think dicking around to make small profits with options is a complete waste of time.  I wrote about the futility of writing covered calls back in early December in the stock thread when folks were wanting to write CC's on AAPL with it trading around $175, and them thinking how that was going to positively impact their cost basis.  NO!  Opening a Covered Call Position in a down-trending stock is a bad idea.

Options is all about understanding risk and utilizing that to your advantage.  Owning the risk (buying a Call or Put)  might mean the odds of a payoff are lower vs Writing a Call or Put.  But done strategically, the tool can be utilized to really maximize gains on both up and down trending stocks.  One needs to be agnostic towards the stock however...and look at the tool of options for profit potential.  Sometimes this risk is worth it...most of the times it isn't.  The manager who blew up his clients accounts by writing naked puts on natural gas is a perfect example of how not fully understanding the risk that makes options dangerous.  Options can be used in almost limitless ways...and again I want to re-emphasize that any of the strategies can be done with risk well managed.  But the key to fully grasp is: What is the risk?  What is the Reward?

If interested I could offer an example.

Good post. I disagree with your claim that taking small profits is a complete waste of time, especially in the example I gave: replacing limit orders to buy stocks with selling puts instead. It is not a "huge gain" kind of move but it has very limited downside (vs. buying via a limit order) so it's almost like giving up a free vig of 5%, say.

Anyway, I've been enamored with the leverage that one can get with buying calls instead of buying stock outright, and I agree it completely hinges on risk vs. reward. I'm confused, however, but your line "One needs to be agnostic towards the stock however..." -- what do you mean by that? For example, I really liked BABA as a stock I wanted to own for 2019 as I think the tariffs will be worked out. Buying 100 shares would have cost me $14000 earlier this month so instead I bought two 155 calls with January 2020 expiration and the total cost was under $3500. That's just incredible, spending about a quarter the price yet getting access to the equivalent to double the number of shares. But I'm not agnostic about BABA as I know a lot about it and bought the calls specifically because I like the underlying. Thanks for the thoughts.

 

[Norman Einstein]

I've been trading options for several years.  Selling defined risk puts/calls and some iron condors/strangles are my main strategies.  I've learned a ton from these guys.  They have created their own network that runs throughout the entire trading day.  Plus, they have their own trading platform which has next to $0 commissions on options.  If you ever decide to open an account you could use my referral link to help a fellow FBG.

 

[siffoin]

Good post. I disagree with your claim that taking small profits is a complete waste of time, especially in the example I gave: replacing limit orders to buy stocks with selling puts instead. It is not a "huge gain" kind of move but it has very limited downside (vs. buying via a limit order) so it's almost like giving up a free vig of 5%, say.

Anyway, I've been enamored with the leverage that one can get with buying calls instead of buying stock outright, and I agree it completely hinges on risk vs. reward. I'm confused, however, but your line "One needs to be agnostic towards the stock however..." -- what do you mean by that? For example, I really liked BABA as a stock I wanted to own for 2019 as I think the tariffs will be worked out. Buying 100 shares would have cost me $14000 earlier this month so instead I bought two 155 calls with January 2020 expiration and the total cost was under $3500. That's just incredible, spending about a quarter the price yet getting access to the equivalent to double the number of shares. But I'm not agnostic about BABA as I know a lot about it and bought the calls specifically because I like the underlying. Thanks for the thoughts.

Ok.  There is a lot in here so let me take it one at a time:

To me there is a lot of unknown risk out there across every asset class.  Probably a lot more than we realize.  Unrecognized risk is our present looming Black Swan.  The article about the optionsellers.com blowing up his clients portfolio is a perfect example.  Options can and should (imo) be used to better understand and manage risk.  And to best do that I would much prefer to use them in positions where I have 100% known risk and unlimited upside...even if that means my odds of "winning" are reduced.  The optionsellers.com guy might have won 99% of the time for 10 years for all I know..but he put on a position of "unlimited" risk and all it took was 1 time to more than blow up his clients accounts.

So rule #1: Ideally - Use options to limit risk AND to maximize gains.

Next:  Success with options requires some ability for consistent scanning/selection criteria to take an educated guess that $XYZ will move in some direction (up, down or flat); that XYZ will move towards a certain price point (up, down or flat); and that XYZ will move in that direction towards that price point by a certain date in the future.  That educated guess lays the foundation of what strategy to employ.

So rule #2: Use a thought-thru "pilots checklist" to scan and select potential candidates in order to improve odds of a successful options strategy and trade.

I understand the concept of writing puts as a means to enter into a position.  But imo it's a waste of time.  Here's an example.  I've scanned a universe of stocks today and have determined that $GLD is a new buy candidate and I would like to take an entry position of 100 shares here at $122.  From my pilots checklist my best guess is that over the next month $GLD will trade from between $120-$125.  So I see a level of support is at $120.  If I were to place a limit order $120 MIGHT be a logical spot. So instead, what I do is write the Feb 120 Put for $.40 and collect my $40.  That's a lunch at Applebees!  And for my best case scenario $GLD trades at $119.75ish on Feb exp and I get put those 100 shares at a cost basis of $119.60.  THAT's MY BEST CASE SCENARIO.  Remember I want to own the position...and my best case is that I bettered the position by $2.40 ($240) having my limit order filled vs. buying today at $122 (less than 2%) or by $.15 ($15) vs having the Puts put to me at $120.  What did I risk?  Well what if $GLD isn't below $120 on options ex?  What if it runs straight up?  What if it flys past $125 and by Feb Ex it's trading at $130?  What if all I get from my trade is a double gut punch from my Applebees lunch and missing out on a nice $8 run...and now am chasing the position up...I've FOMO'd myself and increased the odds that my next move will compound the initial mistake.

Now I get it...collect $40 here and $30 there...and soon it all adds up to a dinner at Ruth's Chris.  But to me if you've done your homework the options can better work by owning unlimited upside potential.  And every once in a while the pay off of unlimited upside potential can be positively portfolio altering.

Agnosticism towards any individual position.  It's best not to fall in love with any company or stock.  They are a tool used to make money.  I'm not picking here just using your example as THE example ($BABA is a good stock with a lot of future potential imo and you have decent odds of winning).  But the question to ask yourself is:  Why do you like $BABA?  What was your selection criteria for picking it? As you've scanned the universe of stocks is it sticking out as the best candidate right now?  Where do you think it will run to?  When do you think it will get there?  Is it possible your opinion is slanted by confirmation bias?  Do the same rules you hold for $BABA hold true for ALL stocks?  If the opposite were true would you be buy $155 Puts?  And after all of that is the position you now hold-  Long $155 Calls Jan 2020 - the single best risk vs. reward?  And how did you calculate risk vs. reward?

I do a scan each month looking for potential high gain "alpha" stocks.  It's a selection process of which I have no idea what the potential "universe" of stocks for the month will be comprised of and it's an elimination process from there.  Sometimes the universe might be 100 stocks...some months it might be less than 5.  I'm agnostic and deliberate in the selection and elimination process  - of course it's always nice if a well known stock comes up in the initial scan.  But quite often I've never heard of the stock.  I'm agnostic towards any stock selected...my research and history shows profitability in the strategy based solely upon the selection & elimination process.  

Options provide almost limitless strategies.  But what works in one situation doesn't necessarily work in all.  In addition you and I could take on the same options strategy but have different levels of risk - depending on our unique situation.  Options strategies in and of themselves are relatively simple...what's difficult is in developing the plan in how your determine which strategy to use depending of the situation. In my perfect world I'd rather use them to have a known small risk for a potential unknown and large reward.  Not the other way around (known small reward and potential unknown and large risk)- ask the clients at optionsellers.com for their opinion for further clarification.

 

[pecorino]

Great post, Siffoin, and I will reply properly at some point. But I've just got to say that I've had a limit order to purchase GLD at $121 for the past week and it just refuses to hit so I bumped it up to $122 today and got my 100 shares. The vig is so small on selling that put, and also I really want to own it, so I sucked it up and paid the extra $100 to grab it today instead of waiting to see if it would dip to $121. Just funny that I'm buying absolutely nothing right now, except for GLD, and that was the example (and the price point) that you used.

 

[Rattle and Hum]

CMG: Sold to open 1 Feb. 8th 575 call @ $6.50

 

[pecorino]

CMG: Sold to open 1 Feb. 8th 575 call @ $6.50

That seems good to me. I’vd been mulling buying a put spread but I want to wait for earnings. Seems to be near its top.

 

[Sand]

Ok.  There is a lot in here so let me take it one at a time:

To me there is a lot of unknown risk out there across every asset class.  Probably a lot more than we realize.  Unrecognized risk is our present looming Black Swan.  The article about the optionsellers.com blowing up his clients portfolio is a perfect example.  Options can and should (imo) be used to better understand and manage risk.  And to best do that I would much prefer to use them in positions where I have 100% known risk and unlimited upside...even if that means my odds of "winning" are reduced.  The optionsellers.com guy might have won 99% of the time for 10 years for all I know..but he put on a position of "unlimited" risk and all it took was 1 time to more than blow up his clients accounts.

We've had 2 spectacular blowups (TVIX ad Optionsellers) that go to show that you can get in trouble ridiculously quick in the markets.  There's a lot to be said for being invested in the NLYs of the world.  No way I could handle the beta of VIX or natural gas in a leveraged arena.

 

[Rattle and Hum]

CMG: Sold to open 1 Feb. 8th 575 call @ $6.50

I covered this at $3.20 this morning. Made $330 - $1.29 for commissions & fees. Margin was about $2400 I believe.  Had the stock exceeded $575 after today's earnings I would have closed after a new 30-min high was put in tomorrow. Loss would not have been pretty.

 

[Dinsy Ejotuz]

Outside losing the money you need to buy the put, what are the risks in taking (relatively) low-cost positions on deep out of the money moves?

For example, a 24+ month LEAP that pays out if the S&P is under 1500 or something like that.

 

[siffoin]

Outside losing the money you need to buy the put, what are the risks in taking (relatively) low-cost positions on deep out of the money moves?

For example, a 24+ month LEAP that pays out if the S&P is under 1500 or something like that.

In a non-hedged situation - so buying or selling Calls and Puts naked - then:

If you own the Call or Put - the risk is 100% defined in every situation.  If you write (sell) a Call or Put your risk is (theoretically) unlimited.

 

[Dinsy Ejotuz]

If you own the Call or Put - the risk is 100% defined in every situation. 

This seems like a big advantage.

I don't know exactly how to ask this, but I want to get at the insurance idea of counter-party risk.  How do I guarantee my put-seller will actually buy if my put ends up in the money? 

Like if I own the right to sell 10 S&P puts (1000 "shares" -- again, sorry I don't have the terminology right) at 1500 and I decide to exercise that with the S&P at 1200 it'll lose $300k for my put writer.  How do I know he/she is good for it?

 

[siffoin]

Your broker/market maker will hold that responsibility.  In addition - while you have the right to hold your position for as long as you want...the other side of the trade can decide to close their position out - flip it to another holder.  So again - theoretically - while you would make $300k - that position could have been flipped dozens of times - meaning you are not bound and tied to another single trader at the other end of your trade for the length of your trade.

 

[Rattle and Hum]

Outside losing the money you need to buy the put, what are the risks in taking (relatively) low-cost positions on deep out of the money moves?

For example, a 24+ month LEAP that pays out if the S&P is under 1500 or something like that.

In a non-hedged situation - so selling Calls and Puts naked - then:

 If you write (sell) a Call or Put your risk is (theoretically) unlimited.

Similar risk to simply owning the stock or shorting the stock. Of course, gains are capped at the premiums collected.  So why do it?

1) Less of hit to buying power for many.

2) you can be wrong on direction but still make money by selling call strikes above current market or selling put strikes below current market. As time passes, the option seller 'typically' benefits.

It's not for everyone and took me a long time to get into it. Last year my account was up a smidge over 10% mostly selling options. Long S&P was down a smidge. I do it because I'm not a long-term investor and not so good at timing the market. YMWV

 

[siffoin]

Similar risk to simply owning the stock or shorting the stock. Of course, gains are capped at the premiums collected.  So why do it?

1) Less of hit to buying power for many.

2) you can be wrong on direction but still make money by selling call strikes above current market or selling put strikes below current market. As time passes, the option seller 'typically' benefits.

It's not for everyone and took me a long time to get into it. Last year my account was up a smidge over 10% mostly selling options. Long S&P was down a smidge. I do it because I'm not a long-term investor and not so good at timing the market. YMWV

Well it's not similar to the risk of owning or shorting a stock because options are leveraged instruments...and the impact of margin as the position goes against you can wipe out the account.  It happens all the time.

If I were going to implement such a strategy it would be something like this:  THIS IS FOR EXAMPLE PURPOSES ONLY - DON'T BE AN IDIOT AND MAKE A TRADE BASED OF MY DUMB ASSUMPTIONS.

• #1) Use only options of Index ETFs.  Risk of catastrophe from a single stock is exponentially higher than in an index ETF.
  
• #2) Write 2 expiration cycles out max - in an effort to have Theta (time decay) work for you.
  
• #3) Look to write something where the odds of expiring at $0 are something like 90%+.  That might be 1.5-2.0 Standard Deviations from the current price.
  
• #4) Look to write only in times of falling volatility (as seen on a monthly chart)- ie: If $VIX is lower today than it was a month ago.
  
• #5) Look to write early in a ST Bullish Trend (we're talking like 60-120 min time frames)
  
• So in this example we might write the $SPY $250 Put March 15 Expiration for $.72 or $72 per contract.  Again.  DON'T DO THIS...IT's AN EXAMPLE ONLY!
  

I personally don't like these trades.  I'd rather do my research, be a buyer, know my risk, sleep well at night etc.  If you held a position like the one above in an environment like Nov-Dec...well let's just say best case it's uncomfortable.

 

[Rattle and Hum]

I personally don't like these trades. 

I totally understand as this is RISK capital for me and most option traders.. I won't feel it beyond my ego if my account blows out. However, it never will because I take losses without a thought and manage risk extremely wisely. To me it's just a way to try and take advantage of math & probabilities. If I buy 100 shares of  SPY at $271 and it goes down to $250 I am down $2100. If I sold a 3/15 $260 Put I'm down about $900. So what if my margin goes up? It won't be as high as the 100 shares you bought. In this scenario, you have unlimited potential upwards and, to me, the same notional potential for loss. I profit with SPY staying between 259 to infinity. The $259-$271 zone is my edge over your pure long. I pay for that by giving up huge profit potential. The reality is, SPY will not rocket more than 10%/month all that often and most will not capture all of those moves. If it goes up a bit, I can buy my short Put back and sell more premium with a bit higher  strike  I'll take achievable 10-20% gains over 8%/year in over-all market with half money at risk (other half in money market). You'll likely say you position trade and do much better. I say if you really can position trade successfully you could be amazing with options. Are you amazing?

Optionsellers used portfolio (?)/institutional margin with FC Stone to maximize leverage on their short Nat Gas trade. They kept adding and adding as Nat Gas went up from what I understand. Of course they were ripe for a blow out...they did not use proper money management like experienced option traders do. Most traders don't even qualify for portfolio margin.

You seem to beat the anti-option drum quite often... Even in a thread about options (always baffles me at FBGs FFA). Good thing for that Otis guy you don't hate potatos. I'm curious what happened to you in the option world that made you so anti options? Warning people that the sky may fall when there are easy methods to hold it up doesn't make a lot of sense to me. Always different ways to make money in the market...lose it too.

 

[culdeus]

Your broker/market maker will hold that responsibility.  In addition - while you have the right to hold your position for as long as you want...the other side of the trade can decide to close their position out - flip it to another holder.  So again - theoretically - while you would make $300k - that position could have been flipped dozens of times - meaning you are not bound and tied to another single trader at the other end of your trade for the length of your trade.

What's the upside for the broker. Do they hedge 

 

[Dinsy Ejotuz]

Your broker/market maker will hold that responsibility.

Thanks for this.  I never really understood the role of the market maker in all this.  After reading a bit it sounds like you can get around my concerns by trading on a strong, long-standing, well-financed exchange?

 

[culdeus]

I mean I sell a naked put.  I've got 50k in a shop.  Black swan happens and I get called for 200k. I walk. Who eats this and how far do I have to run to escape the man?

 

[Dinsy Ejotuz]

I mean I sell a naked put.  I've got 50k in a shop.  Black swan happens and I get called for 200k. I walk. Who eats this and how far do I have to run to escape the man?

Exactly.  Same Q from the other side of the trade.

How does the broker/exchange handle this if there's a widespread disruption in the markets (say 2008, except the Feds are too slow to act).

 

[siffoin]

Exactly.  Same Q from the other side of the trade.

How does the broker/exchange handle this if there's a widespread disruption in the markets (say 2008, except the Feds are too slow to act).

It doesn't work like this.  The broker isn't going to lose.

When you sell (write) a call or put.  You are required to put up margin collateral.  If/when the position moves against you that margin collateral increases.  Same is true with volatility spikes.  Depending on your unique situation it is possible for you to have your account blown up.  Depending on market conditions and your unique situation and time from expiration it is possible to have your account blown up/suffer major losses on a position that eventually "wins."

 

[culdeus]

It doesn't work like this.  The broker isn't going to lose.

When you sell (write) a call or put.  You are required to put up margin collateral.  If/when the position moves against you that margin collateral increases.  Same is true with volatility spikes.  Depending on your unique situation it is possible for you to have your account blown up.  Depending on market conditions and your unique situation and time from expiration it is possible to have your account blown up/suffer major losses on a position that eventually "wins."

Margin requirement can vary.  You can blow thru the call with ease and get nuked and then some. I was curious what happens if you skip town on it. 

 

[siffoin]

I totally understand as this is RISK capital for me and most option traders.. I won't feel it beyond my ego if my account blows out. However, it never will because I take losses without a thought and manage risk extremely wisely. To me it's just a way to try and take advantage of math & probabilities. If I buy 100 shares of  SPY at $271 and it goes down to $250 I am down $2100. If I sold a 3/15 $260 Put I'm down about $900. So what if my margin goes up? It won't be as high as the 100 shares you bought. In this scenario, you have unlimited potential upwards and, to me, the same notional potential for loss. I profit with SPY staying between 259 to infinity. The $259-$271 zone is my edge over your pure long. I pay for that by giving up huge profit potential. The reality is, SPY will not rocket more than 10%/month all that often and most will not capture all of those moves. If it goes up a bit, I can buy my short Put back and sell more premium with a bit higher  strike  I'll take achievable 10-20% gains over 8%/year in over-all market with half money at risk (other half in money market). You'll likely say you position trade and do much better. I say if you really can position trade successfully you could be amazing with options. Are you amazing?

Optionsellers used portfolio (?)/institutional margin with FC Stone to maximize leverage on their short Nat Gas trade. They kept adding and adding as Nat Gas went up from what I understand. Of course they were ripe for a blow out...they did not use proper money management like experienced option traders do. Most traders don't even qualify for portfolio margin.

You seem to beat the anti-option drum quite often... Even in a thread about options (always baffles me at FBGs FFA). Good thing for that Otis guy you don't hate potatos. I'm curious what happened to you in the option world that made you so anti options? Warning people that the sky may fall when there are easy methods to hold it up doesn't make a lot of sense to me. Always different ways to make money in the market...lose it too.

I'm far from "anti-options".  I think it is critical that people understand how much risk is involved in the writing them, which they don't - as evidenced by some of the questions in this thread. 

 

[Dinsy Ejotuz]

Margin requirement can vary.  You can blow thru the call with ease and get nuked and then some. I was curious what happens if you skip town on it. 

Me too.

Especially in an environment where LOTS of investors are being wiped out.

 

[Rattle and Hum]

CMG had a huge move today. It closed yesterday about $526. A typical retail trader would have to have about $11,000 in her acct to sell a short term $525 Call. CMG opened at $568.xx. immediately that trader was down about $4500. At the daily peak (15% up from yesterday's close), down $8500 or so. Plenty of room for the broker to liquidate the position before a negative balance. Of course, an $11k account should probably only selling an option on a $40 or less stock and/or cover exteme-move risk with a long (buy) Call at a higher strike price (risk would roughly be difference of strike prices X 100 shares).

A debit balance likely becomes a valid debt like anything else. My broker has a guy named Sal that chases those debts...drives a Civic for the gas mileage and dependability.