(These men were taking part in Hadaka Matsuri – or the Naked Man Festival)
Now That I have Your Attention….
What I propose is this: A naked May 6000 put sold for a credit of 4. (Annualised that’s a sensational return of around 24%) . FTSE closed at 7114, so a drop to 6000 in one month would be an extreme event. More than 15%. It can happen. What could go wrong?
Naked is Risky
As the picture no doubt attests,naked is risky when a lot of naked people get together! However for options purposes naked means un-hedged risk, but that does not mean abandonment of reason.
Always do a ‘What If’ Scenario
Karen the Super Trader* allegedly used to sell naked options but then lost the plot. You don’t have to. While I do not advocate naked selling you cannot ignore the strategy. I’d prefer a strangle but frankly call premium is terrible. The 7450 is trading at 4. A meer 4.7% OTM. The market has been close to that level very recently. The point of all our trading is knowing what to do when the trade goes wrong. Yes, I know – a trade that went wrong is called an ‘investment’!
Trade Repair
In August 2015 the market dropped big and the 5700 put you sold at 4.5, went to 38,then 50 but by expiry FTSE had clawed its way to >6000.
Chartists might have noticed the huge tail of the candle,and seen this as a market reversal. Others might have panicked, rolled out,closed out for a big loss. You must have a plan. The golden rules is: Never be a forced buyer or seller.
What would I have done? I DID trade through this but with a strategy that gave me the best trade of that year. I will share that for $1million!
Naked, me? Only on the beach on a hot sunny day
I spend more time looking at options prices than anything else. Prices tell us a lot, so when calls are cheap but vol is up it looks like the market is not pricing in a meaningful rise.
Another winner-the put is now trading for 1-why not close out and accept an annualised 18%- that’s twenty times what your bank would pay