What are the advantages and disadvantages of trading naked options vs. spreads?
With spreads, you have to pay up to four commissions (if you have to enter and exit the spread) whereas with a naked option, you only have to pay up to two commissions. You cannot go out of the money as much as you can with a naked option (often $5 to $10 more) because you have to buy another option to hedge your short leg. You cannot electronically execute spread orders for immediate fills like you can with naked options. Depending on which exchange your order is sent to, your spread may not get executed at the price you want because the spread did not get large enough on the particular option exchange your order was sent to even though others may have been able to get the spread you wanted on a different exchange. With naked options, although your chances of losing are much lower, the amount you can lose is much greater. With a spread, you can only lose $5 – the premium you brought in. The margin required to initiate a position is going to vary with naked options depending on the str
