Dear Reader,
Some people ask me why I am so dedicated to NEVER making a naked trade, even when the trade appears to be a “sure thing.”
Well, let me tell you about the first “sure thing” trade I ever made.
I was 24 years old working on the CBOE as a market maker.
After a few months of lurking around I saw a “sure thing” that was going to dump $1,000 into my lap in just 24 hours.
Remember, a $1,000 profit in a day is nice these days…
But in 1989 it was a LOT of money.
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Anyway, United Airlines (UAL) was set to merge with Northwestern for around $200 a share. UAL stock had been trading around $190 for over a month.
The 150 put contracts, which expired the next day, were trading $1 or $100 per contract.
I sold 10 contracts and collected $1,000 in premium.
The whole time I was thinking to myself, “I can’t believe how easy this is! I’m gonna walk away with this $1,000 for doing nothing!”
The next day the merger deal was called off. UAL plummeted $100.
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Now let’s do the math. I had 10 $150 put contracts at 100 shares per contract. That’s 1,000 shares I was on the hook for.
The stock was trading at $100 and the puts obligated me to pay $150 per share…
That means I lost $50 per share, or $50,000 overnight!
And why? Because I didn’t take a few dollars from the $1,000 premium I collected and buy some put options in order to protect myself.
It was, after all, a “sure thing.”
I’m here to tell you, there’s no such thing as a sure thing in the market.
That’s why the cardinal rule for myself and the Options360 community is…
NO NAKED POSITIONS!
They might sound like some fun in the bedroom, but in your trading account, they are a great way to lose big.