I’m considering selling a naked put on GE- have never touched options before but making a small premium on something I’d be happy to own seems like a decent idea. tell me why I’m wrong (thinking I might be) and I’d rather learn my lesson here than on my bottom line 
Think Great Depression like market where it drops 90% from its high and the $300 you would’ve made on that put turns into a $20,000 loss. Selling puts into a volatile, bear market doesn’t make sense to me. Buy calls or sell puts to make revenues when you own or are short a stock, respectively. Or speculate by buying the put or call and be the one who makes the odd $20,000. If you want to own GE, like you said, buy a call, don’t sell a put. I don’t see how selling a put is anywhere equal to owning the stock… If someone is going to chime in and bring up the put-call parity, selling put would require buying a call and a bond all at the same time to be equal… so the risk characteristics are much different.
View it from a capital at risk perspective as opposed to a premium perspective; for instance, don’t think of selling the Nov 17.5 P’s as collecting $1.00, think of it as, at most, a 5.7% return ($1, your maximum upside/$17.50, your maximum downside).
Just read through IronMan’s schooling in http://www.analystforum.com/phorums/read.php?1,850572,page=1 Selling GE puts seem a bit safer to me but I wouldn’t be doing that.
I’m going to go out on limb and say this was a joke to poke fun a certain poster who has been selling naked puts over the last 3 weeks. EDIT: I was too late…
Best case for short put: keep the premium. Worst case: stock plummets, and you have to buy the stock above market price. If you would be willing to buy GE at current price, the worst case scenario doesn’t seem so bad.
I think he’s serious. Yeah, selling a put is in no way the same as owning the stock. If you own the stock, you get the upside if it rips higher and the downside if it gets crushed. So its a fair risk/reward depending on the accuracy of your market view. If you sell the put, if it gets crushed, so do you. If it rips higher, you make $1. Thats why as a viable trading strategy, it pretty much sucks.
commission will erode your profit. so will taxes. it is hard to justify only 1 option. need to do it with more volume
you are selling volatility when you short puts, so if you think the vix will fall and the market will rally it is a good strategy.
Plus you have to submit a bunch of bs paperwork to your broker in order to sell uncovered options.
If you want to sell vol and get the benefit of a market rally, you should buy the stock and sell otm calls against it. If the market goes higher then you make on the stock and if vol comes off then that helps the price of the options come down. at least that way you can make some decent upsaide
hausm49008 Wrote: ------------------------------------------------------- > you are selling volatility when you short puts, so > if you think the vix will fall and the market will > rally it is a good strategy. Are you really selling volatility if you’re not delta hedged though. Sure your short Vega, but Delta will have much more of an impact on your P&L…
Really, check out IronMan’s saga. He sells at $4. The next day, the options are selling for $10 so he has a monumental % loss. Further, there is lots of pressure to realize this loss regardless of your opinion because your broker is calling up and asking for more margin money. You can be right in the long run but closed out tomorrow. That has almost nothing to do with greeks and everything to do with being a risk in someone else’s risk management system.
JoeyDVivre Wrote: ------------------------------------------------------- > Really, check out IronMan’s saga. He sells at $4. > The next day, the options are selling for $10 so > he has a monumental % loss. Further, there is > lots of pressure to realize this loss regardless > of your opinion because your broker is calling up > and asking for more margin money. You can be > right in the long run but closed out tomorrow. > That has almost nothing to do with greeks and > everything to do with being a risk in someone > else’s risk management system. Yeah, I started to read it, but I couldn’t take 7 pages… 7, damn, I can barely even count that high!
as per haus, If you want to trade volatility (ie. expecting volatility to come down), don’t sell a put on an individual stock… You can buy and sell options on the VIX itself you know…
I don’t like negative gamma. The more wrong you are the more it hurts (squared). But my GF who is a PM was talking about selling index puts b/c you get a premium and can enter the index at a price you like for the long term. I think index puts make more sense because an index is more likely to go up over the long term, whereas companies go to 0 much more often and then stay there. I also have been wondering about how delta figures in to this. You might try to sell a put at one price and buy a more OTM put to limit your max loss. People talk about how if your put is exercised, you can comfort yourself that you bought a stock at what you considered a good price. The problem is that at the time you are exercised, almost by definition, it won’t seem like a good price. If you have a disciplined value methodology, however, it could be profitable, as long as company fundamentals don’t change on you between getting the premium and being exercised.
And in between you got pillaged on margin…
I don’t have a good feel for how margin works on puts, but I’m sure that you have a good point here.
Your broker makes you put up margin covering both vol and the stock going to 0. And you get crappy (or no) interest on it. And he always wants more when things aren’t going well.
why not buy the stock, sell a mid-term put that is significantly out of the money. given vix is so high, way out of the money puts are still pretty pricey. this all assumes you plan on holding the stock for the LT.