you are selling gamma & theta. then buying back (hopefully) pure delta. in theory this might work. but the biggest issue is that spreads on such options are often > 50% so you will lose a lot on the round trip transaction to costs.
the motivations for placing limit orders are very different. if the client thinks ‘this stock will get beat up in the next months, but will recover next year’ then buying a 2017 call (with a limit order) might be a better play.
With IBKR we can leverage up to like 6X+. It requires modeling skills, model an extreme decline, the impact on your current holdings, being assigned the put assets at a loss, any tightening of borrowing, etc. You just model all this and make sure you can handle it.
Here’s another fun idea. On another thread we were talking – “what is the S&P500 really worth?”. I said around 1400, or 14X. Well, turns out there is actually a lot of put trading going on down there…
You can sell a SPX put at 1600 expiring Dec31 for almost 1% premium. Nobody is going to sell stocks in mass until the FOMC moves, if they move on Dec16 and the market crashes, will it really make it all the way down to 1600 in two weeks (for insurance you can buy a put at 1500 for around 0.6%). Actually perhaps smarter, sell pre-FOMC 1600 puts Dec11 for a 0.7% premium.
Interesting, this derivatives crap is actually rather fun.
You also cannot use naked options in pension accounts, have had endless calls with lawyers on that. One thing that is interesting: index options settle European and in cash, so they are techically considered uncovered.
Pure_alpha, that is essentially exactly what I am thinking of expanding for big accounts coming out of cash, except at less of a decline. I don’t have a run fully invested, so it makes a lot of sense for more cautious clients
Man, this put selling is way too fun. Sold some way out of the money Apr2016 ASHR puts for a 5.8% premium (strike at the equivalent of Shanghai Composite 2500, so break even 2350). This is totally insane, even if an additional 30% decline in the index, they still break even. It ain’t going down that far, especially with the gov floor in place, and even if it did, that’s exactly where you want to buy not sell.
Easy money selling insurance to clueless scaredy pants chumps. 
even though i’m still quite bearish on the ASHR, that is a pretty sweet trade. i’d do that all day long, but i’d maybe shorten up the time period. Jan or Feb puts maybe.
Yeah, options say 87% chance of profiting, but I’d say more like 95% as the market participants in NY simply don’t understand this market. And downside once you get under 2350 is really limitied. I mean even in the pits of hell before it was open to foreigners to correct mispricings it only went down to 2000 (8X P/E for a country with a 7% growth rate?).
So 5.8% payment, on an assignement that only has a 15% chance of happening, with limited downside if you do get assigned, and massive upside once the index bounces back…that’s just mispriced. Would have liked to shorten it up, but Jan/Feb didn’t quite have the same premium bang. Left room to add more, we might get another panic Q4, or Q1, I’ll add to it then.
Also, there is currency risk here, but I think that is overplayed too. CN won’t let CNH drift far, and they have the stockpiles to enforce.
Taleb would love to hear your story for his next book.
Whoever this Taleb guy is, he can blow me and write about my schlong in his book! 
Actually I’ve been thinking about this (options, not Taleb blowing me), and finding thoughts about “binary stuff” interesting. Obviously you need to model taking assignment on all your short puts/calls. So you can only make so much extra income on this stuff…
But, what if you are selling on two stocks where the outcomes are “either this or that”. For example, if CN really goes down under 2500 in April, what are the odds of S&P500 being over 2100 on that same expiration date? If the driver of CN being down is anything economic, the US will be peeing their pants. So you sell S&P calls and sell ASHR puts. You make money on both, but very low probability of being assigned both. Also even if you do get assigned both, at least you are long/short instead of all one way. This lets you increase the amount you can safely write, a bit.
There must be hedge funds who specialize in this? It’s complex correlation stuff, and the more positions you add, the more complex it gets. Sorta fun.
Taleb is the guy that wrote this book called - if I remember right - The Black Schlong, or something very close to that. It’s about how people underestimate their tail risk until they get screwed deeply by something they didn’t think was possible until they actually experience it for themselves.
His earlier work: Fooled By Handsomness, is actually a more informative read.
Exactly, right now noobs are trying to go 3X long SPX to desperately squeeze out a few more cents into year end, even though that overpriced beast could go black swan on their ass, right down to 900. Which is why I’m short, give me some tail risk please.
In this case, the CSI300 already tanked, so the remaining tail got shorter.
you’re killing me. screwed deeply. once you go black. amazing.
what bchad is trying to say is that if you get some 1987 type market crash, you’re screwed and you may be bankrupted. no government can stop a 1987 type crash. it simply a market anomaly. another example would be that China experiences a fukashima type event and the market gets absolutely crushed as a result.
Naw, what BChad is saying, though he doesn’t realize it, is that it is safe as long as everyone else is doing it, if everyone isn’t doing it there must be a lot of risk.
Blackswans happen to everyone given time, model catastrophic losses before placing trades, duh.
I admit that my post goes dangerously close to the line on acceptability and perhaps steps over it. I plead comic license and the fact that no ill will toward any individual or group was intended here.
However, if one of the other moderators decides it is over the line and deletes it, I will lament but not protest.
I agree. I like idea of being market neutral, yet nimble enough to clean up in either direction. Would you say that what you are describing is in the family of pairs trading? Not sue if it is just standard equipment, but Think or Swim (retail trading platform) has a pairs trade analysis program. It plots out historic correlation values between any two stocks, futures or whatever. I think you can even set it up to place the dual trade when the correlation hits the desired value. I wish I had more time to play around with it as you could use the data to get creative with options set ups. …but I’m too busy analyzing balance sheets and running flashcards for my L1 in December : -(
^live a little
the most well written post it the history of AF… bravo, bravo
haven’t you heard… I’m a reclusive hermit. what else am I doing???
haha that was meant for bchads comment above
“Surely, if Russia defaults, it won’t devalue, and if Russia devalues, it won’t default. One risk offsets the other, so we’re golden. Time to lever up, my friends, those unlevered returns will never let me look like a BSD at da club!”
Meanwhile everyone is ignoring the fact that those trillions of dollars of treasuries could go to zero, levered up fixed income but super safe! Because fat tail risk doesn’t apply if everyone else is doing it…
What we really have here are biases; the fatness of the tails magically adjusts based on nationalistic beliefs. S&P500 @ 850 isn’t a realistic concern, but SSE @ 1500 could definitely happen, therefore investment American! Biases mean mispricing, and there is money to be made off that.
Maybe similar in that it’s correlations, but it’s about decreasing the assignments in your model in order to increase premiums, rather than market neutral long/short.