One theta gang's secret

[lostsoul]

Reddit/u/Ashamed-Designer-174
Question: Whats you secret weapon in trading, share you edge!!

Hey traders, we all know the market is tought, what's your edge that keeps you profitable?
For me: it's understanding liquidity and spotting when charts are manipulated and when price often drops before surging or rises before falling , that's my key insight!

A: (tohams)
Selling premium on 0DTE index options. The edge: implied volatility is historically greater than actual volatility. Therefore the premium you receive is higher than it should've been looking at it in hindsight.

Q: (OptionAmbitious3)
So selling put or call options right? Those possess higher risk, how do you maintain the risk ?

A: (tohams)
Correct. I manage risk by placing stop market orders on the trades as soon as the trades are entered. For example, if I sell an Iron Condor and receive 1.50 credit (x100) on the put side and 1.40 credit on the call side, I immediately place a stop order for 3.00 on the put spread and 2.80 on the call spread. This is a 1x stop. If, hypothetically, the call side stops out (-$140), I'm still up $150 on the put side. The market would have to swing back the other way and hit my stop on the put spread for me to lose both trades. I aim for the same premium on both sides but take what the market gives me: it evens out in the end (I'm over 3,000 trades into the year). As soon as the long option is 0 bid, I convert the stops from the vertical to the short option only. I automate all of this 100% using TradeAutomationToolbox, including entries.

[lostsoul]

Question: Briefly explain selling a naked put, with examples illustrating profit and loss scenarios.

Grok: Selling a naked put involves selling a put option without owning the underlying stock or having a short position in it. The seller collects the premium but is obligated to buy the stock at the strike price if the buyer exercises the option. This strategy is typically used when the seller is bullish or neutral on the stock, expecting it to stay above the strike price.

Key Points:

• Premium: The seller receives the option premium upfront, which is their maximum profit.
• Obligation: If the stock price falls below the strike price at expiration, the seller must buy the stock at the strike price.
• Risk: Potentially significant if the stock price drops sharply, as losses can be large.
• Breakeven: Strike price minus the premium received.
• Max Profit: Limited to the premium received.
• Max Loss: Theoretically large, as the stock can fall to near zero (strike price - premium).

Example:

Stock: XYZ, trading at $50
Put Option: Strike price $45, premium $2, expires in one month
Contract Size: 100 shares
You sell 1 naked put, collecting $200 ($2 × 100).

Scenarios at Expiration:

1. Stock Price Above $45 (e.g., $50):

   • The put expires worthless (no one exercises it).
   • Profit: You keep the $200 premium.
   • Loss: None.

2. Stock Price at $45:

   • The put expires worthless (at the strike price).
   • Profit: You keep the $200 premium.
   • Loss: None.

3. Stock Price Below $45 (e.g., $40):

   • The buyer exercises the put, forcing you to buy 100 shares at $45 each ($4,500 total).
   • The stock is worth $40, so your shares are valued at $4,000.
   • Loss Calculation:
     • Cost: $4,500 (purchase price) - $4,000 (current value) = $500 loss.
     • Subtract premium: $500 - $200 = $300 net loss.
   • Loss: $300.

4. Stock Price Drops to $30:

   • You buy 100 shares at $45 ($4,500).
   • Shares are worth $30 ($3,000).
   • Loss Calculation:
     • Cost: $4,500 - $3,000 = $1,500 loss.
     • Subtract premium: $1,500 - $200 = $1,300 net loss.
   • Loss: $1,300.

Breakeven:

• Breakeven = Strike price - Premium = $45 - $2 = $43.
• If the stock is at $43 at expiration, your loss on the shares ($45 - $43 = $2/share or $200) equals the premium received ($200), resulting in no net gain or loss.

Summary:

• Profit Scenario: Stock stays above $45, you keep the $200 premium.
• Loss Scenario: Stock falls below $43, losses increase as the stock price drops.
• Risk Management: Naked puts carry high risk due to potentially large losses. Margin requirements are significant, and brokers may require substantial capital.

This strategy is best for experienced traders comfortable with the risks and margin obligations. Always consider market conditions and your risk tolerance.

[lostsoul]

Question: What are the main differences between selling a naked put and selling a cash-secured put?

Grok: The main differences between selling a naked put and selling a cash-secured put lie in the risk profile, capital requirements, and account setup. Both strategies involve selling a put option and collecting a premium, but they differ in how the obligation to buy the underlying stock is managed. Below is a concise comparison:

1. Definition

• Naked Put: Selling a put option without owning the underlying stock or having the full cash amount to cover the purchase if exercised. Relies on margin to cover potential obligations.
• Cash-Secured Put: Selling a put option with enough cash reserved in the account to buy the underlying stock at the strike price if the option is exercised.

2. Capital Requirements

• Naked Put: Requires a margin account, with brokers setting a margin requirement (typically a percentage of the stock’s value or a formula based on the strike price). Less cash is tied up upfront, but you need sufficient margin capacity.
• Cash-Secured Put: Requires the full cash amount to cover the purchase (strike price × 100 shares per contract). For example, a $45 strike put requires $4,500 in cash reserved per contract.

3. Risk Profile

• Naked Put:
  • Max Loss: Theoretically large, as the stock can fall to near zero (loss = strike price - stock price - premium). Margin calls can amplify losses if the stock drops significantly.
    • Higher risk due to reliance on margin and potential for uncovered losses.
• Cash-Secured Put:
  • Max Loss: Limited to (strike price - premium) if the stock falls to $0. Since cash is reserved, there’s no risk of margin calls.
    • Lower risk, as you’re prepared to buy the stock at the strike price.

4. Broker Requirements

• Naked Put: Requires a high level of broker approval (e.g., Level 3 or 4 options trading) due to the high risk. Not all brokers allow retail traders to sell naked puts.
• Cash-Secured Put: Requires a lower level of approval (e.g., Level 1 or 2 options trading), as it’s less risky and suitable for most retail accounts.

5. Intent and Outcome

• Naked Put: Often used by experienced traders to generate premium income with a bullish/neutral outlook, accepting higher risk for lower capital commitment. If exercised, you buy the stock, potentially at a loss not fully covered by cash.
• Cash-Secured Put: Used to generate income or to buy a stock at a lower effective price (strike price minus premium). If exercised, you own the stock with a predetermined cost basis, fully covered by cash.

Example (Same Setup for Comparison):

Stock: XYZ at $50, sell 1 put with $45 strike, $2 premium ($200), 100 shares/contract.

• Naked Put:
  • Collect $200 premium, hold margin (e.g., $1,000-$2,000, depending on broker).
  • If stock drops to $30, you buy at $45 ($4,500), stock worth $3,000, net loss = $1,500 - $200 = $1,300. Margin calls possible if account lacks funds.
  • Max profit: $200 (stock above $45).
• Cash-Secured Put:
  • Collect $200 premium, reserve $4,500 in cash.
  • If stock drops to $30, you buy at $45 ($4,500), stock worth $3,000, net loss = $1,300 (or cost basis $43/share). No margin calls, as cash covers the purchase.
  • Max profit: $200 (stock above $45).

Summary Table:

Aspect	Naked Put	Cash-Secured Put
Capital Required	Margin (less cash upfront)	Full cash (strike × 100 shares)
Risk	High (margin calls, large losses)	Lower (no margin, loss capped)
Max Loss	Strike - Premium (if stock → $0)	Strike - Premium (if stock → $0)
Broker Approval	High (advanced options level)	Lower (basic options level)
Purpose	Income, high risk tolerance	Income or stock purchase at discount

Key Takeaway:

• Naked Put: Higher risk, lower capital upfront, suited for experienced traders with margin accounts.
• Cash-Secured Put: Lower risk, ties up more cash, ideal for conservative investors aiming to generate income or buy stock at a target price.

Consider your risk tolerance, account type, and investment goals when choosing between these strategies.

[lostsoul]

前几天看 Theta gang，觉得不太适合我的策略。
这几天又想了想，也许是个不错的补充。