Don't Be Irresponsible

Sean McLaughlin
April 6, 2023

I recently came across a video on youtube from a very smart man – whom I respect and have had several favorable interactions with – that made me shake my head.

But before I throw any shade on any other professional colleague, let me be the first to say that I’m no genius. My shit stinks too, and I’m sure I’m equally guilty of throwing questionable ideas or thoughts out into the metaverse from time to time. I’m human, just like everyone else.

So here’s what got me rankled.

The video had a catchy title like: “How I made fourteen hundred dollars in one day trading 0-DTE options.”

Ok. I’m interested. I like to make that kinda money each trading day. Tell me more!

The short video went on to demonstrate how this trader sold a slightly out-of-the-money naked put in $SPX options expiring that same day – a day in which SPX rallied from start to finish making the put expire worthless. This allowed the trader to keep the $1400 he collected from selling that one put contract short near the open of trading that day. That’s pure profit, baby!

Cool. Great trade!

But here’s the thing. Actually, here are several things…

In a traditional margin account for your average stay-at-home trader, your brokerage will require you to hold north of $80,000 of margin to sell this one put contract! That’s a metric ton of margin for one contract that you plan to hold for less than 7 hours!

So maybe you have that kinda free buying power available to you. Great. Or maybe you trade at a Prop firm or hedge fund or another well-capitalized trading desk. Super. If that’s you, go sell naked puts all you want. When they are out-of-the-money, they are high-probability bets. It’s just math.

But man… when they go against you intraday, the negative gamma in those short puts can bite you in the ass in a hurry! And SPX is one giant beast of a product – it’s 10 times the size of $SPY, which is what most retail traders trade when expressing bets on the S&P 500.

Don’t be seduced by the relative ease of making money by selling naked short options. Yes, it can be done. And I know there are many people who consistently make money employing these types of strategies. But you can’t be lazy about it. And you have to watch your positions like a hawk. It’s definitely not easy.

Think hard about the very real risks in trading naked options and have a very clear game plan on how you’ll play defense when needed.

Trade 'em Well,

Sean McLaughlin
Chief Options Strategist
All Star Charts, Technical Analysis Research

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