Worst of Naked Puts for 2020 (Part 1)

I’ve been revisiting the idea of naked puts (NP) and did some backtesting of Feb-Mar 2020, which is when the most recent market crash hit hardest.

I actually composed this as an e-mail to someone and I’m going to leave it largely unchanged. Trade management dictates rolling down and out with unspecified parameters. Being unspecified, I just allude to the roll in a general fashion.

Here’s the worst for 2020: 12 Jun 2425 NPs sold for $4.30 on 2/19/20 (121 DTE) with SPX at 3387.41 and Avg IV 11.49.

On 2/24/20, with SPX at 3229.63 (Avg IV 21.78) the NP is $11.05. Would you roll with the strike at 2425? If so, then you could roll down 75 points and out one month for a credit. Thereafter, you can’t roll down more than 50 points for a credit.

On 3/16/20 (95 DTE), NP is ITM and $317.90 with SPX 2409.18 (Avg IV 78.49). For a credit, you can roll out one month and down 25 points. You could also roll out two months and down 50 points for a credit.

On 3/18/20 (93 DTE), NP is ITM and $326.90 with SPX 2382.30 (Avg IV 74.65). For a credit, you can roll out one month and down 25 points. You could also roll out two months and down 75 points for a credit. It’s hard to imagine execution, though. OI exists, but the options are very expensive. In normal markets, $0.05 slippage on $5.00 is 1%. Here, 1% is ~$3.25. Compound that with market crash conditions…

On 3/19/20 (92 DTE), NP is ITM and $275.90 with SPX 2409.63 (Avg IV 68.98). For a credit, you can roll out one month and down 50 points. You could also roll out two months and down 75 points for a credit (not with the lousy execution, though).

On 3/20/20 (91 DTE), NP is ITM and $293.25 with SPX 2309.66 (Avg IV 62.48). For a credit, you can roll out one month and down 25 points. You could also roll out two months and down 75 points for a credit (not with the lousy execution, though).

On 3/23/20 (88 DTE), NP is ITM and $285.55 with SPX 2253.66 (Avg IV 60.94). For a credit, you can roll out one month and down 25 points. You could also roll out two months and down 50 points for a credit (not with the lousy execution, though).

On 4/1/20 (79 DTE), NP is ITM and $193.05 with SPX 2472.64 (Avg IV 56.08). For a credit, you can roll out one month and down 50 points. You could also roll out two months and down 100 points for a credit (not with the lousy execution, though).

It gets better after that, but any of these losses are horrendous. Even 4/1/20 is 44x the initial credit, and this doesn’t even account for the fear level of trying to roll in these market conditions. On 3/18/20, the original 12 NPs would be down $387K.

I will continue next time.