The other day, one of the talking heads on CNBC stated that one of the largest brokerage houses was recommending that retirees sell naked puts to increase their income from their investment portfolios. Heaven help those who took that advice!
In his 2002 Berkshire Hathaway letter to shareholders, Warren Buffett had this to say, “We try to be alert to any sort of megacatastrophe risk, and that posture has made us unduly apprehensive about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”
Naked puts are potential uncollateralized receivables that could wipe out entire brokerage firms and those individuals choosing to sell them for income. Their magnitude is beyond anything I have ever seen before. On May 13th, those playing Russian roulette in the market found that the chamber was empty. Will the same happen for the June options expiration?