Protect Your Nakeds!

I subscribe to a mailing list that focuses on covered call writing. I often see people fail to acknowledge risk and it makes me a bit uneasy.

This was taken from a 2014 post:

> I will be happy to buy QCOR at 65 if it is put to me.
> Based on reading many of the QCOR reviews I believe
> QCOR is fundamentally very strong… If put to me I
> appreciate Citron’s work that adds to volatility and
> will reward me if and when I sell a CC for a high
> premium.

People short puts on Enron or any other stock that ultimately went bankrupt said the same thing before it went to zero. When the stock is well on its way to zero, no stockholder, naked put trader, or covered call writer will be happy.

Some people use explicit wording instead of a smug “I’ll be fine because I feel comfortable owning the shares” attitude. An example is often given by people advertising covered call services or option educators who say “sell the put at a strike price at which you would be happy to purchase the stock.”

I think either of the above clouds the real issue: risk management.

The bottom line is if I take assignment on a naked put then I’m probably losing money. If I don’t have an exit strategy then I better hope to high heaven the stock doesn’t go to zero! Regardless of how “happy” I say I’ll be if assigned, I’ll feel more and more heat if the stock continues to slide further. If the stock tanks substantially and then trades sideways then I will be highly frustrated sitting on what feels like dead money because I won’t be able to collect meaningful premium on the [now] deep OTM calls.