Disliked{quote} Yep, always a trade-off between risk and reward. No way around it. Thinking about it, in a way selling naked is more conservative than selling spreads, because the high margin requirements of selling naked mean you can't sell so many; whereas the low margin requirement of selling spreads means you can go to town and get clobbered when (because it's always when) the u/l goes in the opposite direction to the one expected.Ignored
But that whole "undefined" risk thing with nakeds is somewhat illusory, since it assumes that you do nothing in the event of a breach of the naked, do nothing in the event of an assignment, and then proceed to let the underlying go to "0" (in the case of a short put breach) or to infinity (in the case of a short call breach) without doing anything to mitigate your loss. I mean, who the hell does that?
That being said, I recall watching TastyTrade during a live call in and a guy was a day out from expiry, in call, and was wondering what he should do. Tom commented that he had a small "mechanics problem," but you could tell by his face that he was thinking, "WTF?". So I guess there are people out there who really don't have a clue of what to do when a setup goes awry and those seemingly onerous margin requirements for nakeds are there for a reason.
But the assignment of the "undefined" label by the broker is just a way of their categorizing the trade for purposes of margin ... . Unfortunately, it's to the naked short trader's disadvantage.
Fireworks are fun ... as long as you don't blow your fingers off.