Naked Puts (Part 9)

I suspect my discussion about leverage is as important a concept to explicate as anything else regarding this approach.

I started by comparing naked puts and long shares with equal capital risk. The graph makes it clear that long shares are more profitable. To get that profit, though, I was going to have to endure a whole lot of pain.

This process also helped me realize the trade can be very expensive in terms of capital risk. With options it looks possible that I can take on even more capital risk and still be safer (historical drawdowns) in bear market conditions.

As a cautionary note, I feel people must understand other details I did not cover before trading this strategy. I did not take several more blog posts to explain technicalities I work with every day. One should understand differences between underlying markets, what options to trade, and when to trade them. One should also understand details about execution and about transaction fees. I took all this into account when running the numbers.

Specific details will also vary from one trader to another in terms of position sizing. One needs to understand what kind of accounts will allow this type of trade. One needs to understand margining and what to expect as the market moves. Fixed vs. variable position sizing should be understood along with particular implications about the graphs as I have presented them. These are things people learn as they take time to study how options work and how to trade them. Many of these details I have described elsewhere in this blog.

I may come back at a later time and flush out more of the technical details. For now though, I will affix the bow: that’s a wrap!