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Message
Can you sell calls to establish a short position?
Posted on 7/9/16 at 6:51 pm
Posted on 7/9/16 at 6:51 pm
I sell puts and covered calls frequently but my question is with the spy up here near ath if I want to sell say 213.50 or 214 calls next week while not holding any spy would that assign me a short position? Or what would happen? I wouldn't mind getting short at 213.50 or 214 with that premium as well. I know I can get short here but I'm asking if I could sell naked calls,collect premium in the meantime to establish a short position?
6
Posted on 7/9/16 at 6:53 pm to dabigfella
quote:
I'm asking if I could sell naked calls,collect premium in the meantime to establish a short position?
Yes (subject to your margin requirements)
Tread carefully, and polish your crystal ball.
Posted on 7/9/16 at 6:54 pm to tokenBoiler
Yea margin isn't my issue just asking if say I wanted to short 500 shares of spy could I just sell 5 calls at $214 and say the spy closes at $214.50 next week I wake up with an assigned short position?
Posted on 7/9/16 at 7:10 pm to dabigfella
Index option is European style and settles in cash. The notational value is greater, although less volume.
I think with SPY, you're trading options on the ETF, not the index, so settles in shares, and American style.
I'd look to SPX, not SPY, for these reasons.
But with SPY you can trade the underlying and hedge. You can't trade the index, so that should be considered as well.
I think with SPY, you're trading options on the ETF, not the index, so settles in shares, and American style.
I'd look to SPX, not SPY, for these reasons.
But with SPY you can trade the underlying and hedge. You can't trade the index, so that should be considered as well.
Posted on 7/10/16 at 7:15 am to dabigfella
I think that is a "short" position per se.
Understand that when you sell a call, you have the obligation to deliver shares IF assigned.
Understand that when you sell a call, you have the obligation to deliver shares IF assigned.
Posted on 7/10/16 at 8:17 am to makersmark1
That's what I was asking, is it like selling puts as in I wake up Saturday morning with a short position? That's what I wanted
Posted on 7/10/16 at 10:06 am to dabigfella
SPY options are American style, it wouldn't necessarily have to be the Saturday morning of settlement, it could be any day.
If you were going to sell SPY calls naked, you had better consider entering a two to three legged hidden conditional to protect yourself. I'd enter a three leg. One to buy to close, and directed to a different market center, and one to buy the underlying. And the market could still blow through both of these without your orders executing.
You'd be extremely vulnerable to a one day event (terror attack etc), and also vulnerable to a market maker knocking out a protective order that wasn't hidden, or wasn't directed to another exchange.
At a minimum you need to trade this someplace where you can see options market depth at several centers. The closest you'd get to that is probably Interactive Brokers.
If you sold SPX, it would take significantly more money, but would be considerably better insofar as it takes the one day event out of play. Unless it is on settlement day. And when it settles in cash, theoretically it is the same gain/loss, but in reality it's not for obvious reasons. Having said this, you wouldn't be struggling to buy shares.
If you were going to sell SPY calls naked, you had better consider entering a two to three legged hidden conditional to protect yourself. I'd enter a three leg. One to buy to close, and directed to a different market center, and one to buy the underlying. And the market could still blow through both of these without your orders executing.
You'd be extremely vulnerable to a one day event (terror attack etc), and also vulnerable to a market maker knocking out a protective order that wasn't hidden, or wasn't directed to another exchange.
At a minimum you need to trade this someplace where you can see options market depth at several centers. The closest you'd get to that is probably Interactive Brokers.
If you sold SPX, it would take significantly more money, but would be considerably better insofar as it takes the one day event out of play. Unless it is on settlement day. And when it settles in cash, theoretically it is the same gain/loss, but in reality it's not for obvious reasons. Having said this, you wouldn't be struggling to buy shares.
This post was edited on 7/10/16 at 10:09 am
Posted on 7/10/16 at 10:39 am to Iowa Golfer
But a terrorist attack wouldn't hurt someone short spy bc the spy isn't going to levitate on that news. I don't really see anything that's gonna spike the spy up a ton in one day on the horizon lol we're at all time highs and it seems to fail everytime were up here. I don't mind going short as is but I'd rather do it $1 higher and make a little money selling calls to get in right at ath
Posted on 7/10/16 at 12:08 pm to dabigfella
All I'm saying is if something drives SPY up, you should consider how you're going to risk manage the trade.
If you have a conditional buy to close if SPY spikes 20%, and the market blows through this and your order doesn't execute, you're not going to like it.
It's an American style option, so you're going to have to watch it almost all day, every day.
I'd do a credit spread, buying further out of the money calls. At least at that point you have a maximum loss that you know upfront. The difference between strikes, plus expenses.
CW says naked calls have unlimited loss potential. That's true in theory, not necessarily in practice, but it can happen unless you've done something to risk manage it. Even then there is no guaranty your hidden conditionals execute.
If you have a conditional buy to close if SPY spikes 20%, and the market blows through this and your order doesn't execute, you're not going to like it.
It's an American style option, so you're going to have to watch it almost all day, every day.
I'd do a credit spread, buying further out of the money calls. At least at that point you have a maximum loss that you know upfront. The difference between strikes, plus expenses.
CW says naked calls have unlimited loss potential. That's true in theory, not necessarily in practice, but it can happen unless you've done something to risk manage it. Even then there is no guaranty your hidden conditionals execute.
Posted on 7/10/16 at 12:24 pm to Iowa Golfer
Dude I love you Iowa golfer but wtf is gonna spike the spy already at all time highs up??? Lol the cure for cancer or the fountain of eternal youths discovery lol cmon man the spy is never about to jump 20% quickly ever, much less at all time highs. More than likely 212-220 is probably the top for a while.
Posted on 7/10/16 at 12:26 pm to Iowa Golfer
In theory yes unlimited losses but whose gonna buyout the spy and burn me? We're already trading at high valuations across the board this isn't some hot biotech company with 1000% upside I'm trying to short
Posted on 7/10/16 at 1:37 pm to dabigfella
Sounds like you have all the answers already....
Posted on 7/10/16 at 2:18 pm to birdieman
Not really, my question was is it like selling puts which means you wake up Saturday and if assigned you have your shares. With selling say $214 calls next week if the spy closes at say 214.30 will I was up short spy shares at 214.xx counting premium?
Posted on 7/10/16 at 2:46 pm to dabigfella
I personally know someone who started buying naked calls and did quite well when the market was rising. Really well. He made nearly a million dollars in the calendar year. Sadly, he didn't quit while he was ahead and the next year lost all his gains and called it quits when he was back to his original amount.
Still, breaking even isn't that bad right? Ah, but here the IRS stepped in. You see, after his up year he had to pay short-term capital gains tax. Of course, with that kind of gain he was in the top tax bracket and wrote Uncle Sam a very large check. Probably well into six figures although I wasn't privy to the exact amount.
But you can't offset your capital gains against previous years for more than $3,000. Assuming his first year's tax was 100k he needs to claim that $3,000 loss for the next 34 years just to break even on taxes.
Conclusion - if you make a ton of capital gains, understand you were basically just lucky and quit.
Still, breaking even isn't that bad right? Ah, but here the IRS stepped in. You see, after his up year he had to pay short-term capital gains tax. Of course, with that kind of gain he was in the top tax bracket and wrote Uncle Sam a very large check. Probably well into six figures although I wasn't privy to the exact amount.
But you can't offset your capital gains against previous years for more than $3,000. Assuming his first year's tax was 100k he needs to claim that $3,000 loss for the next 34 years just to break even on taxes.
Conclusion - if you make a ton of capital gains, understand you were basically just lucky and quit.
Posted on 7/10/16 at 2:51 pm to birdieman
Sell naked 100 SPY July 213.50 calls. Total premium collected under $6,500. Sell the calls blind without a contingent buy order, or any sort of loss cap. Sell them on e-trade, or think/swim, or some other pre school platform where you can't route and at least attempt to hide the trade, so it is a big red "come knock me out" signal to a sophisticated trader. Because if I can see it, I guaranty they can see it. Now there is no way to know it's naked, but it doesn't matter, you can see the retail trading platform it's coming from and figure it out.
There are at least two options trades to short SPY where you'd have less risk. Much less risk. For about the same reward.
I absolutely do not see any good reason to take this kind of risk for such a small gross return.
I get that you're interested in collecting premium, and the anticipated return is about 13% a month. But you never really spelled out what month. Doesn't matter, you're going to need right around $300K cash or margin to get this done. Maybe more depending on who you trade with. Maybe less if you have portfolio margin.
But if you did a credit spread, buying the July 218.50, you cut your premiums down maybe $800, cash or margin is maybe $20K, and risk is cut so dramatically I cannot even begin to attempt to explain this. Maybe if all hell breaks loose, you get out at under a $50K loss. Basically $5 per share X 100 shares X 100 contracts.
You're going to have to explain to me how $6500.00 gross is enough of an incentive for the risk you're about to undertake. If your broker even lets you do this.
You are one brave dude. A 2% day would crush your trade instantaneously. A 2% week and you're still one hurting dude.
When calls are sold uncovered for the average retail guy they're really looking for non directional trading. You could get that here, but the issue is there is so much volume in the SPY, you could get crushed in a hurry.
There are at least two options trades to short SPY where you'd have less risk. Much less risk. For about the same reward.
I absolutely do not see any good reason to take this kind of risk for such a small gross return.
I get that you're interested in collecting premium, and the anticipated return is about 13% a month. But you never really spelled out what month. Doesn't matter, you're going to need right around $300K cash or margin to get this done. Maybe more depending on who you trade with. Maybe less if you have portfolio margin.
But if you did a credit spread, buying the July 218.50, you cut your premiums down maybe $800, cash or margin is maybe $20K, and risk is cut so dramatically I cannot even begin to attempt to explain this. Maybe if all hell breaks loose, you get out at under a $50K loss. Basically $5 per share X 100 shares X 100 contracts.
You're going to have to explain to me how $6500.00 gross is enough of an incentive for the risk you're about to undertake. If your broker even lets you do this.
You are one brave dude. A 2% day would crush your trade instantaneously. A 2% week and you're still one hurting dude.
When calls are sold uncovered for the average retail guy they're really looking for non directional trading. You could get that here, but the issue is there is so much volume in the SPY, you could get crushed in a hurry.
Posted on 7/10/16 at 3:01 pm to Iowa Golfer
It's nothing like selling a put. Your worst case scenario is someone puts shares to you at your strike price.
Selling short, or selling calls, means if they're exercised against you, you need to go buy shares at whatever price it's trading at, and sell them at your strike price.
So if you sold 100 213.50 calls, you'd sell someone the right to buy 10,000 shares from you, shares you don't own. Shares you'd need to go buy, or your broker would buy for you. And not only on Saturday morning, but any day during the week.
Well, options are hardly ever exercised. But with SPY they could be. You'd have a lot of institutions risk managing their holdings on this one. Although most would be in SPX for reasons mentioned earlier.
Take a calculator to this, you are headed in a very dangerous direction.
Selling short, or selling calls, means if they're exercised against you, you need to go buy shares at whatever price it's trading at, and sell them at your strike price.
So if you sold 100 213.50 calls, you'd sell someone the right to buy 10,000 shares from you, shares you don't own. Shares you'd need to go buy, or your broker would buy for you. And not only on Saturday morning, but any day during the week.
Well, options are hardly ever exercised. But with SPY they could be. You'd have a lot of institutions risk managing their holdings on this one. Although most would be in SPX for reasons mentioned earlier.
Take a calculator to this, you are headed in a very dangerous direction.
Posted on 7/10/16 at 3:01 pm to Iowa Golfer
100 calls!?!! Wtf man that's like a $2m trade. I've got a lot of money but I'm more of a 5 call guy on that trade haha
Posted on 7/10/16 at 3:03 pm to foshizzle
I don't buy calls ever, I want to sell calls bc I feel like this is at or near the top of the market. Its a totally different game from buying premium
Posted on 7/10/16 at 3:07 pm to Iowa Golfer
I sad many times I want to scale into an overall market short that I don't mind holding up here around $213.50-214. Dude the spy doesn't just run away on you so no I have zero fears look at the economy it's closer to a recession than a boom so I could care less if I'm short at 213.50 and it runs to 218 by some act of God, that's a 3% loss why the hell am I such a risk taker. The upside here is less than 5% imo and the downside is up to 20% or more on the spy. Again this isn't some biotech that's gonna run 30x on me, hell I bet you won't even see 10% on the spy from here in the next 36 months, that would be spy 234 lol it's way more likely we see 180 or lower than 230 or higher
Posted on 7/10/16 at 3:15 pm to dabigfella
Naked call on SPY would be about 15-20% margin requirement, so about a $200K trade. If nothing went whacko.
Do me a favor, if you sell 5 213.5 calls, you're talking about collecting $320. That's it. For a lot of risk. Dor theoretical unlimited risk.
If you do a 213.50 / 218.50 credit spread, you have the same trade, less risk, and $280.00.
Neither of these is enough money to get excited about.
Buy 5 210.5 puts and you've spent $530.00, and this is your entire risk.
You risk on the credit spread is $2,500.00.
Your risk on selling the call naked is unlimited.
Read that out loud and explain to me why you want to sell naked calls.
Do me a favor, if you sell 5 213.5 calls, you're talking about collecting $320. That's it. For a lot of risk. Dor theoretical unlimited risk.
If you do a 213.50 / 218.50 credit spread, you have the same trade, less risk, and $280.00.
Neither of these is enough money to get excited about.
Buy 5 210.5 puts and you've spent $530.00, and this is your entire risk.
You risk on the credit spread is $2,500.00.
Your risk on selling the call naked is unlimited.
Read that out loud and explain to me why you want to sell naked calls.
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