Tnsn2345, when i was trying to define "naked position", simliar thoughts also came to my mind (i.e. Buy option is naked position).
....But majority of traders blow their account in abnormal situation i.e. mkt is locked on limit or other black swan events. I am sure you will agree that if nifty has to lock tomorrow lower filter of -15% (900 points drop) then even with 50 qty of short put, the loss will be 50*900 = 45k which is more then account size.
....Buy option position can not hurt us beyond our trading account hence I classify them in safer category.
Dear Aw,
I will give an analogy which may seem out of context but actually it isn't.
If there are riots in the city, I will not send my child to school the next day.
On Diwali night, I will close all doors and windows.
On the Holi, I will step out for my office post lunch.
Or during monsoon, I will not even stop at my favourite 'pani puri' kiosk.
On the same lines, when I know there is a large likelihood of something adverse happening due to the sentiments / perceptions / reality in the environment, I am taking all precautions.
Not otherwise.
So....
If there are riots in the city, I will not send my child to school the next day. -
My child goes to school on all other days.
On Diwali night, I will close all doors and windows. -
They are otherwise open on other festivals.
On the Holi, I will step out for my office post lunch. -
I go out every morning on other days.
Or during monsoon, I will not even stop at my favourite 'pani puri' kiosk. -
I hang out regularly during other seasons.
So for all the 'predictable' black swan events, it is foolish to write Options, but if you live life fearing black swan event to happen 'every day' and hence not write Options, then we should also plan our every day assuming it is our last day to live. Which we don't. Death is inevitable (the ultimate Black Swan event) but we still live life in it's denial, we make plan for the day, for the week, and a vacation a few months in the future. Totally oblivious of the fact that we
may not get up from the sleep tomorrow.
So if you ask me would I write Options if I knew tomorrow is the election result day, I will say - No. If there is rising tension with our neighbour and a threat of a war - No. But if there is none of this sort, then - Yes.
But then there could be some unpredicatble black swan events, viz a massive earthquake the country, a 9/11 kind of event etc. If I stop writing Options for this reason, then I should also plan and live my each day like it is the last one for me, which I don't. All of us don't !
To die it takes one second, but to come out alive it take nine months. Meaning, the markets can crash at any news and keep going down (hit lower circuits), but markets will not rise abruptly (hitting circuit filters) and keep rising at a breakout of good news - a good news which is not predictable in nature (election results day markets are predictable - will most likely result in a good or bad outcome). So with context to my above real life examples, I will not put my head on the block by writing naked written Options on such predictable day.
So with the above thoughts, if you still think writing Options is risky then don't write atleast the naked Put Options, but why not writing naked Calls, why crucify this opportunity.
Regards,