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Asked a question 3 months ago

What are the risks involved in Naked option buying?

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If you are with the market i mean trend then you will be the happiest person to buy a option rather then sell!

Buying involves no risk other than premium.

u bought for 25k at any position.  it is going to expire or grow.  u r not going to make loss more than your 25k(paid already)

Naked option buying - Where the trader will have the only probability to loss his premium paid amount and also will have a good range to access the profits, and limited Loss ( If he is placing a stop loss).

Risk involved is the only amount that is paid in the premium. So unless and until you are taking a big quantity it should be safe!

 

Buy Premium is the only risk.

Time decay and losing the whole capital is the reason!

Naked options are pleasing to traders and investors because they have the expected volatility built into the cost. Suppose the stock moves in the opposite direction to what the option buyer anticipated or even moves in the buyer's favor but not enough to account for the volatility already built into the price. In that case, the option seller gets to keep any (OTM) premium. Generally, that has restated the option seller succeeding in around 70 percent of trades, which can be appealing.

Maximum risk involved in naked option buying is limited to the extent of premium paid.

That said, as an option buyer, the key risks to keep in mind are:

  • An adverse move in the underlying price
  • Theta decay (which amplifies as the expiry gets closer)
  • IV contraction

Risk is only the premium. If you have divided your capital into parts and taking risk of the whole premium paid. Then options buying with naked position will take you like a roller coaster.