The Write Way to Survive.

From Ch.Tate (see attached)
Enjoy

 

I read that today; forget where though. I started reading it with interest, but then I started to question the article.

Point one: writing naked puts doesn't exactly have an unlimited downside, it's limited by zero. Pretty basic stuff for someone who's meant to be an expert to not know.

Point two: is some random fact he decided to throw in for who knows what reason. Traders know that win/loss and money management is more important than accuracy, but what has that got to do with naked options being bad?

Point three: he is trying to say that outlier moves are always bad for naked option writers. Maybe half the time, just like any other investment. This is just being silly I think.

Point four: if you understand the value of a company and write a naked put because you believe it is worth more, then what is wrong with taking delivery when the market gets it wrong (according to your opinion)? It may not be good for TAs and strict trading, but then you just roll up and/or out. What's the big deal, it's not all about accuracy as he mentioned earlier.

Then he goes onto survival rules...

Rule 1: consider writing a naked put rather than buying a stock and writing a covered call against it. Anyone that knows put-call parity will tell you it's the same position but cheaper brokerage. Sure the share could drop and you could get stuck rolling out for lots of $$$ or have to take delivery for lots of $$$. But guess what happens if you own the share; it goes down just as much too!

Rule 2: Totally agree, I try to keep reminding myself of this; trade the volatility.

Rule 3:Obvious, hardly a survival rule.

Rule 4: Agreed.


Sorry for the rant, it is just frustrating when you spend time to read something and it's a load of crap. Reminds me not to pay money for these courses or believe everything I read. This guy is meant to be an expert!

 

I do not know where you could read his newsletter - unless Chris sent it to you directly.

I do not trade options myself but I think you misunderstood what Chris is trying to say.

He is trying to explain the "ugly" face of writing naked puts because even those who think that know all about it, are too often in big trouble.
It's no doubt that naked puts carry greater risks than covered ones. It makes no sense to me to write naked puts because company has value, and play with roll up/out if things go wrong.
Buy company shares instead and become an investor.
Unlimited downside in this case does not necessarily mean that.
It may be just expression option traders are using.
Not every trader knows that win/loss/money management is more important than accuracy.
After all nothing is wrong with naked puts if you know what you are doing.

Seems to me that Chris is very lucky that you agree with him at least on few rules.
You may not pay money for those courses (as you said) but keep in mind that Chris is one of the finest pro traders you can come across, and with his 20 years experience in this profession and his ability to successfully trade all markets, a lot of people consider him as an expert.
But ... you see with the experts sometimes there is one problem.
If you want to fully understand what they are talking about you must be almost as good as they are yourself.

 

http://www.tradinggame.com.au/newsletter/tg-nl_06-07-11.htm

Trading Game Newsletter - July 2006
From: Trading Game <[email protected]>
To:
Reply-To: <[email protected]>
Date: Jul 13 2006 - 9:56am

--------------------------------------------------------------


I was sent the trading game newsletter via email and above is a link to the web version.

You mention covered puts, can you please explain how they work again

You don't write naked puts for long term investment. So buying shares for long term investment hardly substitutes for options trading. There are tools in the toolbox for different reasons.

I do not doubt he has done well or that people regard him as an expert. We grew up in a world of lies and misconceptions and people are generally naive, I understand that too. My point was this so called expert has put out a newsletter that defies the most fundamental concepts of options. I can see how it appeals to the general public because they can't think for themselves.

For those who have ever been regarded an expert, they'll know how overrated experts are

 

I was sent the trading game newsletter via email and above is a link to the web version.

You mention covered puts, can you please explain how they work again

You don't write naked puts for long term investment. So buying shares for long term investment hardly substitutes for options trading. There are tools in the toolbox for different reasons.

I do not doubt he has done well or that people regard him as an expert. We grew up in a world of lies and misconceptions and people are generally naive, I understand that too. My point was this so called expert has put out a newsletter that defies the most fundamental concepts of options. I can see how it appeals to the general public because they can't think for themselves.

For those who have ever been regarded an expert, they'll know how overrated experts are [/QUOTE]

You can write both naked calls and naked puts (strangle) to cover back pocket if market is moving in the wrong direction.
If you got his newsletter so you probably know who the man is...
I do not necessarily agree with term expert because even brilliant traders are making mistakes from time to time.
I fully agree with you in regard of lies, misconceptions etc....
And that is why I am laughing all the time when I hear terms such as "guru" or "expert". As you correctly said general public can not think. What is even worse a lot of traders can not think either.
Statistics are telling us that 7 traders out of 10 constantly losing money. So Chris is trying to "straight" few things up in his newsletters to give some advise to those who are willing to listen.

 

Hi,

Most of the brokers / online brokers I have spoken to have required a lodgement of capital equal to amount of your position when writing naked puts. If this is the case for all brokers, with that much capital locked away its not a very good %age return.

Westpac example. If you lodge $23,000 equivalent to 1000 WBC shares, and write 1 naked put contract and get say $300 a month (assuming u never get excercised - not likely) is $3600 a year, 15% income, 0% growth (before brokerage costs). Compare that to buying 46000 worth of the actual stock with a margin loan, capitalising the interest, getting $2000 worth of dividends, plus some growth, plus the ability to write some covered calls if one so desires.

I'm not a big fan of naked puts

 

why not write your puts using a margin loan as well

using your example...

$23000 own funds
$23000 margin loan

write 2 puts = generates $600 premium

Earn 4 - 5% on interest on funds used as collateral = $153 to $191 interest

Assume never exercised

(600 + 151)*12 or ($600 + $191)*12

= $9012 return or $9492 return (less brokerage as you discussed)

Pay 23000 * 8% for margin loan = $1840 pa

Cash in the deal = $23000 + 1840 = $24840

Return on investment or cash on cash return = 36.3% return or 38.2% return.

Not bad, as long as you are comfortable with the risks involved.

I am not recommending this to anyone but if you introduce the margin lending component to disprove one strategy, introduce it on a balance argument.

OSS

 

Thanks OSS.

I wasnt aware that one of the margin lenders would match a cash lodgement for the purposes of naked put writing.