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Naked Options Selling!

  • #1
  • First Post: Edited May 9, 2007 12:25pm May 8, 2007 5:02pm | Edited May 9, 2007 12:25pm
Sold short NZD/JPY call, strike 89.71, expiry May 14th, 2007 for 15 pips.

I actually entered the (first) live trade yesterday, but decided today to start posting my trades here on a regular basis. I've been forward testing this strategy for a few months. In case of a disaster (pair flys past the strike) I cover the option with a spot position.

update (May 8th): Delta falling faster than Bush's approval ratings...

update (May 9th): NZD unemployment data to be released today @ 6:45pm EST. This is definitely a must watch to make sure the position stays safe.
  • #2
  • May 8, 2007 11:01pm May 8, 2007 11:01pm
Quoting ragingbull94mtx
Sold short NZD/JPY call, strike 89.71, expiry May 14th, 2007 for 15 pips.

I actually entered the (first) live trade yesterday, but decided today to start posting my trades here on a regular basis. I've been forward testing this strategy for a few months. In case of a disaster (pair flys past the strike) I cover the option with a spot position.

update: Delta falling faster than Bush's approval ratings...
Well, Sell Call @ 89,71. so u hope the price will go down, i'm right ?
sorry, i want to ask some question here :

1. why u choose sell call naked? isn't that too risky (at least for me), coz if price go up, then u'll have unlimited loss.

2. when u sell call, ATM, ITM or OTM ?

3.how long u'r sell call 'til expired.is it 1 month?

sorry for my english, hope u understand
  • #3
  • May 9, 2007 12:10am May 9, 2007 12:10am
Think about this for a second. If a "disaster happens", such as if the price moves up 1000 pips above your strike price. You will end up losing big. There will be no way to cover the option with a spot position in time for a price low enough to break even. You will lose as much as it goes up and past the strike price. If you try to buy the underlying, you will pay the much higher price.

1000 pips with JPY during 6 hours of sleep isn't that uncommon.

Of course, maybe you're planning on setting some buy orders. But, if the price gaps significantly, it wont help. If you get assigned the call, you will have to pay much more than the amount you would make in the purchase of the underlying.

I'm just sharing this to help, so please don't take it the wrong way. Selling naked calls can be very dangerous. Note: I mainly have experience with equity options, and not forex options. I've only traded forex options on demo accounts.

Frank


Quoting ragingbull94mtx
Sold short NZD/JPY call, strike 89.71, expiry May 14th, 2007 for 15 pips.

I actually entered the (first) live trade yesterday, but decided today to start posting my trades here on a regular basis. I've been forward testing this strategy for a few months. In case of a disaster (pair flys past the strike) I cover the option with a spot position.

update: Delta falling faster than Bush's approval ratings...
  • #4
  • May 9, 2007 12:28am May 9, 2007 12:28am
Quoting frank99
... Think about this for a second. If a "disaster happens", such as if the price moves up 1000 pips above your strike price. You will end up losing big.
Frank ...
i agree with you frank, coz the weakness of sell call, u have unlimited loss and profit only premi / month. i'm afraid of gap, can't stand with that....

so be carefull .....
  • #5
  • May 9, 2007 7:20am May 9, 2007 7:20am
Quoting frank99
Selling naked calls can be very dangerous.
Frank
especially if one is writing nzdusd calls. good luck.
  • #6
  • May 9, 2007 10:29am May 9, 2007 10:29am
Mizzu_x7, DunningDuke,

Thanks for the feedback guys. I also looked into an equivalent "Covered Call", but the premium wouldn't make it worthwhile for the few cases that I looked at. I looked into buying the underlying first, and then selling a Call. However, what if the pair drops much further than the price of the premium? The premium was so small even for the highest paying volatility pairs, that the range was so small. The pair could only move one or two hundred pips or so during a 1 month period to be profitable.

How are people making money with forex options? Is it mainly through speculation?


Thanks,

Frank
  • #7
  • May 9, 2007 10:51am May 9, 2007 10:51am
ah, good to see some options trading at FF

it is little known that options are ole merlin's expertise

regarding the covered call, dont feel as though you have to purchase the underlying of the exact currency that your option is for. some currencies have high degrees of correlation, yet the options are priced at different implied volatilities. you may want to look for the cheapest volatility from a basket of currencies that are correlated, and buy an option instead of the underlying. but if you went into the trade naked, and now you are second guessing that decision, it sounds like you are in a bad situation, and there are not any great solutions for you. you just have to get out alive and hope to learn from the situation.
Relax and be happy.
  • #8
  • May 9, 2007 11:54am May 9, 2007 11:54am
Quoting frank99
Mizzu_x7, DunningDuke,

Thanks for the feedback guys. I also looked into an equivalent "Covered Call", but the premium wouldn't make it worthwhile for the few cases that I looked at. I looked into buying the underlying first, and then selling a Call. However, what if the pair drops much further than the price of the premium? The premium was so small even for the highest paying volatility pairs, that the range was so small. The pair could only move one or two hundred pips or so during a 1 month period to be profitable.

How are people making money with forex options? Is it mainly through speculation?

Thanks,

Frank
what do u mean by covered call? is it Buy Futures + sell call coz if the price go up your sell call will covered by your Futures ... or Buy call + sell call (Max loss is Spread). for me, that's to expensive buying options forex coz i don't have a lot of money

sorry, but i don't really know what pair drops much further than the price of the premium ... and yes of course if u'r on Short position on options 1 month is the best choice but if u'r on Long position the best choices is 3-7 months ...

i think the profesional traders have a strategy on the forex options, about speculations i don't know ...

i hope there's someone know about Gap Strategy about forex options, coz so far i know only for stock ...
  • #9
  • Edited 12:30pm May 9, 2007 12:20pm | Edited 12:30pm
Quoting MizZu_X7
Well, Sell Call @ 89,71. so u hope the price will go down, i'm right ?
Exactly.

Quote
sorry, i want to ask some question here :

1. why u choose sell call naked? isn't that too risky (at least for me), coz if price go up, then u'll have unlimited loss.
That's correct. I choose to sell the call naked because I don't want to forefeit any premium for the safety of buying a call (or buying a put if I sold a put) at a higher (or lower, if it's a put) strike price.

Quote
2. when u sell call, ATM, ITM or OTM ?
Definitely out of the money.

Quote
3.how long u'r sell call 'til expired.is it 1 month?

sorry for my english, hope u understand
I understand, and thanks for the questions! I set expiration for 1 week to limit my exposure.

Quoting Frank
Think about this for a second. If a "disaster happens", such as if the price moves up 1000 pips above your strike price. You will end up losing big. There will be no way to cover the option with a spot position in time for a price low enough to break even. You will lose as much as it goes up and past the strike price. If you try to buy the underlying, you will pay the much higher price.
Thanks for the tip, Frank. I'm very aware of the risks involved, but if I even get a whiff that something is afoot, I'll buy a call option with a higher strike (than the one sold...).

Quote
1000 pips with JPY during 6 hours of sleep isn't that uncommon.
I'm prepared for that.

Quote
Of course, maybe you're planning on setting some buy orders. But, if the price gaps significantly, it wont help. If you get assigned the call, you will have to pay much more than the amount you would make in the purchase of the underlying.

I'm just sharing this to help, so please don't take it the wrong way. Selling naked calls can be very dangerous. Note: I mainly have experience with equity options, and not forex options. I've only traded forex options on demo accounts.

Frank
That's cool, and I definitely appreciate the help! I've been forward testing my strategy for about 3 months and I've seen pretty much everything. I've learned from the mistakes I made, though and am confident that the strategy I have will work in the long run. Keeping the position size small also helps to mitigate drawdowns.

Quoting x7
i agree with you frank, coz the weakness of sell call, u have unlimited loss and profit only premi / month. i'm afraid of gap, can't stand with that....so be carefull ...
Quoting duke
especially if one is writing nzdusd calls. good luck.
I will! Thanks!

Quote
How are people making money with forex options? Is it mainly through speculation?
I'd agree with that.

Quoting merlin
but if you went into the trade naked, and now you are second guessing that decision, it sounds like you are in a bad situation, and there are not any great solutions for you. you just have to get out alive and hope to learn from the situation.
Absolutely!
  • #10
  • May 9, 2007 6:07pm May 9, 2007 6:07pm
Update (May 9th): The New Zealand unemployment rate came out at 3.8% as expected... higher than the 3.7% for the previous period. Kiwi/Yen spiked up about 30 or so pips before coming back down to around the 88.03/88.08 level where is stands now. Option position status -- safe.
  • #11
  • May 10, 2007 2:38pm May 10, 2007 2:38pm
Update (May 10th): Mild unwinding of carry trades (as expected) means the option is further out-of-the-money.
  • #12
  • Edited 7:05pm May 13, 2007 6:09pm | Edited 7:05pm
Update (May 13th): New Zealand retail sales came out better than expected... NZD/JPY jumped about 60 pips from the low of the day. The New York cut (10:00am EST) is only about 14 hours away and I still have about 115-125 pips of leeway between the strike and the current price.
  • #13
  • May 14, 2007 4:36pm May 14, 2007 4:36pm
Sold short NZD/JPY call, strike 89.60, expiry May 21st, 2007 for 14 pips.

update (May 14th): Still have a neutral-bearish bias on the pair as well as GBP/JPY and AUD/JPY.
  • #14
  • May 15, 2007 1:05pm May 15, 2007 1:05pm
Quoting jones_jemma
Can you cover yourself if your selling naked options by purchasing far out of the money look back at bets for traders. Spotted this exotic structure on their yesterday. They have 11 or so currency pairs. ranging from 1 -20 per point. Worth a look may eliminate some of your risk exposure when going naked.
Thanks for the tip! I'm sure my broker offers exotic options in addition to the vanilla, but the former is not immediately available through the platform. I'd probably have to work something out with the dealer.
  • #15
  • Edited 7:53pm May 21, 2007 3:28pm | Edited 7:53pm
Sold short AUD/JPY call, strike 100.55, expiry May 28th, 2007 for 14 pips.

update May 21st, 2007: Neutral-bearish sentiment on this pair.
  • #16
  • May 21, 2007 3:47pm May 21, 2007 3:47pm
Quoting jones_jemma
Can you cover yourself if your selling naked options by purchasing far out of the money look back at bets for traders. Spotted this exotic structure on their yesterday. They have 11 or so currency pairs. ranging from 1 -20 per point. Worth a look may eliminate some of your risk exposure when going naked.
I checked with my broker and they do not offer exotic options. Only vanilla options, so this strategy would require me to use another broker.
  • #17
  • Edited May 23, 2007 2:12pm May 22, 2007 5:14pm | Edited May 23, 2007 2:12pm
update May 22, 2007: Forgot to mention that I held the same view for NZD/JPY and GBP/JPY. I chose AUD/JPY because there were no significant news announcements to be released this week for Australia. With the others, NZD trade balance, BoE meeting minutes and UK GDP is set to be released this week. So far the position is still fairing well, wasting away as expiration draws nearer. Hedge orders still firmly in place.

update May 23rd, 2007: Carry trades have exploded with significant JPY weakness across the board. The pair came to within 20 pips of the strike.
  • #18
  • May 24, 2007 1:21pm May 24, 2007 1:21pm
update May 24th, 2007: Profit-taking in JPY-based pairs ahead of Japan's CPI data.
  • #19
  • Edited May 29, 2007 3:37pm May 28, 2007 4:14pm | Edited May 29, 2007 3:37pm
Sold short GBP/JPY call, strike 242.54, expiry June 4th, 2007 for 21 pips.

update May 29th, 2007: Not much to report on the position. GBP/JPY fell to as low as 240.50 thereabout before rebounding a bit, now around the 241 level. Employment data helped rally the yen. It'll be interesting to see if/how the upcoming industrial production figures, if positive, impact the pair.
  • #20
  • Jun 1, 2007 2:22am Jun 1, 2007 2:22am
update June 1st, 2007: JPY crippled against CAD, AUD, NZD. Reversal imminent. Saxo Bank recommends purchasing short-dated put options. Personally, I would *consider* an out-of-the-money put time spread on the carry pair I think will fall the hardest... if I wasn't so bent on selling options. It'll be interesting to see what happens. US non-farm payroll report due out in a couple of hours.
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