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Naked options vs. defined risk - A comparison

One of our students asked the following questions, the answers to which I thought you all might find valuable.

Q: "So far I've been selling cash-secured put options on large-cap, dividend earning stocks that I wouldn't mind owning. The plan is to switch to selling covered calls if I get assigned. Is that a good way to trade?"

A: Perfect way to trade, especially if you don't mind owning the stocks

Q: "Could you tell me what are the pros and cons of choosing to trade: 1. Cash-secured puts and Covered Calls?"

A: Puts - Higher POP, much easier to maneuver, and if it weren't cash secured like in an IRA, it would be a much lower margin for each trade

A: Covered Calls: If things go your way, you can make more money faster, but your POP is lower than a Naked Put, and there is less maneuverability (what I mean by this is rolling out for more time or even down for a higher POP)

A: Naked puts and rolling down and out when hitting the strike price. (recommended on Tastytrade) - Rolling is an art, not a science. so you never really know whether it will work in your favor ultimately or not. But what it does do if nothing else is give you more time to "be right" and increase your chance of it becoming a successful trade. Now the flip side of rolling is, when you are wrong you are usually very wrong, and sometimes the longer you roll and extend the losing trade, there is always more chance of it becoming a bigger loser as well (and believe me, I have been victim of both). So rolling is always a choice. Me personally, I try to stick to closing my naked trades at about 21 DTE, and avoiding rolling in most cases. But that is purely my choice, but it is a choice that research has proven most effective over time.

Q: "Iron Condors and Selling Verticals, pros and cons?"

A: Pros are always defined risk. You know what you are getting into and you know the best and worst case scenario every time, unlike Naked trading.

A: Cons are your POP is usually going to be lower every time compared to naked and the amount of money you can make will usually be less also. But it sure helps you sleep at night, especially if you are new to trading.

Hope that helps, Kal


Trading Risk Disclaimer

All the information shared is provided for educational purposes only. Any trades placed upon reliance of SharperTrades, LLC are taken at your own risk for your own account. Past performance is no guarantee. While there is great potential for reward trading stocks, cryptos, commodities, options, forex and other trading securities, there is also substantial risk of loss. All trading operations involve high risks of losing your entire investment. You must therefore decide your own suitability to trade. Trading results can never be guaranteed. SharperTrades, LLC is not registered as an investment adviser with any federal or state regulatory agency. This is not an offer to buy or sell stocks, cryptos, forex, futures, options, commodity interests or any other trading securities.

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