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Naked Options

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Selling Options Short.


Selling Options
(Short Positions)
Buying Options
(Long Positions)
Profitable - Written puts (i.e., puts sold short) can provide a trader with extra income in a flat to rising market.  Profitable - Long puts are profitable only in a falling market.
Profitable - Written calls (i.e., calls sold short) can provide a trader with extra income in a flat to falling market.  Profitable - Long calls are profitable only in a rising market.
Time erosion is an option seller's ally. Even if the underlying security moves somewhat against the direction of the short position, the sale of short options can still bring in a profit due to an option's time value erosion.   Time erosion works against the option buyer. As a general rule, the longer an option buyer stays in a position, the greater the risk that the purchased option will drop in value - even if the underlying security moves slightly in favor of the long position.
Maximum gain - You keep 100% of the premiums received from selling short options.   For calls, the maximum gain is theoretically unlimited. For puts, it is substantial.
The maximum loss is theoretically unlimited; however, traders are always restrained to a certain extent by their brokers and by margin requirements.   The maximum potential loss for long options is 100% of the premiums paid for those options.

By comparing the benefits (outlined in the table above) of selling short options and of buying long options, it becomes evident that option sellers have more opportunities to profit. Option sellers only lose money if the underlying security moves substantially against their position (i.e., contrary to the predicted direction). In flat markets - or when the underlying moves modestly against one's position - it is still possible to make money (because of an option's time erosion which benefits the option seller).

On the other hand, option buyers have the advantage when it comes to limiting their potential losses. When selling options short, traders risk losses that can far exceed the amounts originally required to establish the position. In contrast, an option buyer's risk is limited to the amount of the premiums paid.

In summary: Option sellers have more opportunities to profit, but they face the risk of larger potential losses. In some situations, losses may be mitigated by the use of a stop-loss strategy. Index options are safer than individual equity options in this respect there are no mergers or buyouts where a stop loss may be meaningless if trading is halted before an announcement is made.

 


Best Months

Apr 2008:

 +224%

Mar 2008:

 +241%

Feb 2008:

 +341%

Dec 2007:

 +227%

Nov 2007:

+167%

Oct 2007:

+127%

Jan. 2007:

 +83%

Nov. 2006:

+122%

Oct. 2006:

  +71%

Aug. 2006:

  +74%

July 2006:

  +73%

Mar. 2006:

  +75%

Based on actual trades autotraded by major brokers

Uncovered SPY Options Signals
Past 6 Months

+451%

-12%

Our
Signals
Buy
& Hold

As of 7/4/2008

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DISCLAIMER: THIS INFORMATION IS INTENDED FOR EDUCATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE ANY FINANCIAL ADVICE. RISK IS INVOLVED IN ALL STYLES OF MONEY MANAGEMENT. Uncovered options trading involves grater risk than stock trading. You absolutely must make your own decisions before acting on any information obtained from this Website.

The return results represented on the web site are based on the premium received for the selling options short and do not reflect margin. It is recommended to contact your broker about margin requirements on uncovered options trading before using any information on this web site. Use our "
Trade Calculator" to recalculate our past performance in relation to the margin requirements, brokerage commissions and other trading related expenses. Past performance is not indicative of future results.
   
 

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Risk Statement: Naked options trading is very risky, many people lose money trading and losses can exceed the amount invested.

 

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7/4/2008 - SV1
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