The 'Naked Put' Trap: Is retail selling the tail-risk that institutions buy?
I've been watching the trading culture in Asia for a while now and there's this massive, obsession with selling naked puts as the "ultimate" income strategy.
The pitch I keep hearing: “Just collect the premium...."
The reality? You're picking up pennies in front of a steamroller. Capped reward with uncapped downside.
Here's what clicked for me. The big boys or some US based traders I meet online, are on the other side of these trades. So while retail out in Asia are playing "passive income provider," prop/prop-type traders are paying the premium retail is selling. They're the ones holding the risk-managed long vol side.
I actually stumbled onto a long options strategy from an ex-Goldman guy awhile back and it completely changed how I think about this. Here's what it did for me:
- Max loss is known before I even enter the trade
- Less anxiety, as it shifted the way I viewed risk
- A more mechanical way of trading, so p&l becomes less volatile.
So my question to the sub: Why is retail (and particularly out in Asia), so obsessed with naked selling when defined-risk is mathematically better for long-term gain? Is it impatience? Is it lack of education? Or are banks just really good at marketing this “income stream” to clients who don't understand the simple risk that stocks can always go lower and lower and lower.... or even to zero? (Think 2008 or even CS at 88 cents now)