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cbot gambling vs investing
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OldMcdonald
Posted 8/30/2014 16:03 (#4047340 - in reply to #4047168)
Subject: Selling options naked eh? You spend much time at the craps table too?


Napanee, Ontario
Haha I'm just messing, but in all seriousness be careful. Selling options naked, as an invetment undertaking, is NOT a passive investment strategy by any means. If you try to treat it as such you will not have your 50k for very long. It is nearly a full time Job IMO - researching the correct strikes, probability models, collateral requirements, all in addition to picking which companies you want to take positions on, and the burden of research and analysis that additionally entails.

Very active focus and continual attention is required. Its a business, not passive investment - and in Canada any income garnered from it is taxed as such. You are effectively an insurance underwriter. If you are prepared to treat the strategy as a business that requires active and regualr invoelvement, than i encourage you to move forawrd with cautious positions. Sell short dated options, never have more than 2-3% of your capital sold into any postion, never have more than 25% of your capital exposed at ANY time (ie 75% in cash collateral) depending how far otm you sell, or until the expiry is almost certain to be worthless. This can be tricky because as positions get closer to expiry, they will decrease in value and it is tempting to take new ones to bump your market exposure back up to 25%, and collect more premiums.

I have learned the hard way on this, read further if you want to find out. Your story about blowing up 130k sounds awfully similar to an experience I had, which I posted in a thread over in stock a while back. You might get a kick out of it - uncanny that it's the same figure.




http://talk.newagtalk.com/forums/thread-view.asp?tid=491351&mid=399...


"Made Close to $130k buying calls on company called CCME. Had stars in my eyes and head was as big as a beach ball..... so of course i couldn't see the danger that was right in front of me.

About 2 or 3 months later, Deloitte and Touche dropped them as a client, and wouldn't sign off on their 2010 numbers. DT also released a statement saying their last three years' audit opinions were compromised and couldn't be relied upon.

After cashing out the calls, I Had sold about 12k work of puts on the company in time leading up before hand - premiums were massive, and seemed like a 'sure bet'. Guess i found out why. About 5 minutes after the news broke those 12k in puts ballooned into a 140k black hole.That was when the broker's credit department called me and gave me 1 mintue to liquidate or they were doing it for me - stayed on the phone with me to ensure it happened. Luckily they did. Company went dark after that, and trading was halted for two months. It opened up on the pink sheets @ $4 and I would have been out 600k. yea... yikes. So even though I ended up losing it all and then some, I Guess I was 'lucky' hahaha

Turned out that the company was a total sham. The options market had incredible volume and open interest for a company that was only 700 million in market cap.... like i said, found out why. The options, as well as the huge run in the underlying, was a major con job by some connected insiders and Russian mafia related hedge fund outfits. Law suits are still going on I beleive, but most people are just S/t outa Luck. I doubt we'll ever find out the whole story. Just another hard knock lesson.

It was an experience i'll never forget. Quickly learned how much risk there is in selling options naked. Sometimes learning the hard way is the only way to learn. I'll never forget that huge knot feeling that rose up in my gut, the moment when i heard the news about Deloitte. I almost puked in my office garbage can. People talk about that feeling... but until you experience it, it's only then that you relaize it's something you never want to feel again in your life. Six flags had nothing on that ride."





Edit: to this question: "How do you trade as an investor instead of a gambler?"

What worked for me after, was going in with a set strategy and sticking to it. I wanted to sell 2-3 month options, and collect the premiums as a regular income stream. Which meant I held to expiry. Sometimes when most of the premium has been realized well ahead of time, I would sell it, but I wasn't selling options to just get a gain on capital. I looked at it like generating an income stream. I hope that helps some, just my take anyways.

In any event, Good luck in whatever you choose. If it were me, I would probably try to buy land or another rental property, but that's primarily because I don't have the time to undertake your desired strategy. I did enjoy it quite a bit, and it can be a very lucrative business if you take the necessary precautions to guard you from the ENORMOUS amount of risk involved, and devote the time you need to picking your positions.

Edited by OldMcdonald 8/30/2014 17:51
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