Writing Options

[marcus]

if you're new to options trading do not even consider writing a naked option, you will have to pay a margin and your losses are unlimited unless you square off especially in these volatile times when there are so many problems and brokers have shut down their systems during trading hours you losses may be unprecedented.

 

[rajsingh]

Writing naked options in these volatile times are a no-no.

 

[rajsingh]

Maximum risk for a naked put would be if index went to 0 ,So if u wrote a 5300 put your max loss is 5300*50/lot.

Similarly for a naked call . On that cheerful note. Ciao.

 

[oxusmorouz]

Hello all,

i am new to options and i have one doubt.
I see options as source of permanent income :i.e write options and recieve premium.
but many are opposing.....saying avoid writing options......
it is very risky.

pls post ur experience..., sugesstions, and throw light on this issue.
i am quite confused...pls help me...

TIA

When you talk about an estimated return on investment, there are basically 2 points to consider. Probability of profit and loss, and the magnitude of profit and loss. You can write puts and earn 50pts in the nifty for 10 months, and the market crashes badly on the 11th month, by more than 500 pts, you still end up in the loss. Naseem Taleb quotes this fine concept in "Fooled by Randomness" (Although we learn and often unlearn this concept in school/college).
Can you make money by writing options? Maybe. However, it depends "in the least" on the understanding of probability distribution.
Download a "normalrandom(Mean,SD)" function for excel, place a mean of current stock/index value with an average 30 day standard deviation, and simulate the end of the month stock/index value 10,000 times odd then calculate the payoff. You will hopefully get a clearer picture.