Writing Naked Calls

[jim2000 10]

Has anyone here ever written naked calls. If so how did that work out?

[TinGull 10]

Writing anything naked is really risky. If you're interested in writing and receiving premium, then sell call spreads. You're hedged that way and the margin required is much less.

[jim2000 10]

Writing anything naked is really risky. If you're interested in writing and receiving premium, then sell call spreads. You're hedged that way and the margin required is much less.

 

I understand the risk that the stock could skyrocket up, you get assigned and have to buy the stock at e.g. 70 to sell it at 55, a loss of 1500 per contract. But who would be stupid enough to do that?

 

What do you think of this scenario?

 

When you sell a naked call you don't care which direction underlying goes. It goes down, that is great. It goes up, you buy the stock just below the strike price to cover. If price stays below strike at expiration, great. Then either sell stock or write covered call. At this point there are many strategies to employ.

 

Am I missing something?

 

Who would be foolish enough to not cover if the underlying was approaching the strike?

 

Any thoughts on this?

[TinGull 10]

I do see your point there...I guess a lot of people would prefer to sell options hedged with options so their not having to tie up all their margin in a few trades. Its a huge margin risk to calculate your returns on.

[jim2000 10]

I do see your point there...I guess a lot of people would prefer to sell options hedged with options so their not having to tie up all their margin in a few trades. Its a huge margin risk to calculate your returns on.

 

Yeah, but it is almost a no lose trade. That is if you watch it carefully.

 

Also, on paper it's a huge margin risk, but in reality there is no risk, zero risk, because you will cover the call at, or just before the strike if needed, even just above strike is ok. If after buying the stock it starts to drop, just sell it at market

above the breakeven point.

 

You enter the trade receiving, not spending, cash.

It doesn't matter if the underlying goes up or down.

Even if it goes above the strike before you can act you have a cushion to

work with, the premium you received.

Sell a call near the expiration to avoid the need to watch it closely for 5 or

6 weeks.

You don't need to study charts to pick a good company, just look at the

options chains for different stocks until you find an option with

a high enough premium to make it worth the while. Probably at least $1

All you really need to do is be prepared to buy the stock, no problem

If it does go above the strike if the option is excercised that's ok because

chances are you will still be within your profit zone, if not and you take

a small loss, that will happen from time to time, but not often

 

Like I said before, a gap up before you buy the stock, or a gap down after buying the stock are the 2 risks to this trade.

 

Oh, this is all my opinion, not a recommendation.

[momentom 10]

I was an options market maker for many years and have seen writing naked calls done over time.

 

If the trader has some expertise then it works for a time and profits get re-invested and size increases until the day when an unexpected event happens and the trader goes bankrupt.

 

I've seen it happen over a dozen times in the last 20 years. A great example was on Comex Gold in the late 1980's. Look it up. They were smart rich guys.

[jim2000 10]

I was an options market maker for many years and have seen writing naked calls done over time.

 

If the trader has some expertise then it works for a time and profits get re-invested and size increases until the day when an unexpected event happens and the trader goes bankrupt.

 

I've seen it happen over a dozen times in the last 20 years. A great example was on Comex Gold in the late 1980's. Look it up. They were smart rich guys.

 

Thanks Momentom,

 

I appreciate your reply, and I will heed your words.

 

I'll look up Comex Gold and study that situation. I'm assuming these smart rich guys got cocky, greedy, and over leveraged.

 

Thanks again. I appreciate your perspective.

[aiki14 10]

Thanks Momentom,

 

I appreciate your reply, and I will heed your words.

 

I'll look up Comex Gold and study that situation. I'm assuming these smart rich guys got cocky, greedy, and over leveraged.

 

Thanks again. I appreciate your perspective.

 

You want to be in a liquid market as well. You need to be able to move the underlying or move the options quickly, or you can get caught. And overleveraging is very risky, but unlikely in stock options.

[thrunner 10]

I'll look up Comex Gold and study that situation. I'm assuming these smart rich guys got cocky, greedy, and over leveraged.

You don't have to look very far or be very cocky to lose when you write options, btw, all these talk of market manipulation below should be prefaced as "alleged". A lot of market makers will claim market manipulation when they lose, which they almost never do when they make money :

Options

Interactive Brokers Cries Foul

Liz Moyer, 07.06.07, 4:00 PM ET

 

For the second time since its public stock debut in May, derivatives trading giant Interactive Brokers Group says options market manipulation is weighing on its business.

 

The firm was hit with a $37 million loss in May because of manipulative trading activities on the German electronic stock market, it said in a regulatory filing late Thursday. News of the loss and its potential effect on second-quarter revenues sent shares of Interactive (nasdaq: IBKR - news - people ) down nearly 8% in heavy trading Friday.

 

Interactive Brokers says several other market makers were also affected by the trading, which is being investigated by German financial regulators, and that their losses are also believed to be "substantial."

 

The activity happened in shares of German company Altana (nyse: AAA - news - people ), which had declared a special dividend early in May to coincide with the sale of its pharmaceuticals division. On the ex-dividend date, 31 million shares, or about 44% of Altana's outstanding shares, crossed the electronic Xetra market. The price dropped 25%, pushing the price of the related options "into the money." Interactive Brokers, as a market maker for Altana, ended up on the wrong side of those trades, to the tune of $37 million.

 

Altana's shares recovered the next day, shooting up 64% after those who sold the previous day to avoid the taxes on the dividend payment bought up shares.

 

Interactive Brokers claims traders "unlawfully colluded" to manipulate the stock.

 

It's not the first time Interactive has claimed market manipulation is costing it money. In May, after its highly anticipated initial public offering, the firm announced a $25 million loss as a result of being on the wrong end of trades. The trading activity suggested some were taking advantage of non-public information in advance of major corporate announcements.

 

Several other options market making firms, including closely held Peak6 in Chicago and Goldman Sachs (nyse: GS - news - people ) in New York, have complained that possible manipulation is cutting into revenues. There are a limited group of such firms, but they control about 44% of trading, according to Options Clearing Corp. As the name implies, options market makers arrange orderly trading in options between buyers and sellers. When a client goes to sell and there is a lack of buyers, the market maker puts his own firm's capital at risk to make the trade. When a customer wants to buy and there are no sellers, the market maker pulls from his own firm's inventory.

 

In recent months, there have been some days when demand for certain call options--a bet that the underlying stock is about to rise in price--overwhelmed supply, and Interactive Brokers had to meet the demand. That meant it was on the hook to lose if the stock shot up, which happened a few times during the first quarter, hence the $25 million shortfall.

 

[aiki14 10]

You don't have to look very far or be very cocky to lose when you write options, btw, all these talk of market manipulation below should be prefaced as "alleged". A lot of market makers will claim market manipulation when they lose, which they almost never do when they make money :

 

Blaming someone else when things go poorly and taking full credit when things go well? Frankly I am shocked.