the greatest shortcoming in writing naked puts, in my view, is the decreasing "gamma" as the stock moves in your favor and the increasing gamma as the stock moves against you.
DELTA -- is the percent of a point that the theoretical value of an option will change for a one-point change in the underlying stock, index or futures. For example, if a put stock option has a Delta of .50, the stock option will move up 1/2 of a point for every point that the stock moves down one point.
GAMMA -- is the amount the Delta will change if the underlying stock index or futures changes one point. For example, if the Delta is .50 and the Gamma is .10, if the stock price decreases by one point, the Delta will increase to .60 (.50 + .10 = .60).
so, if in a short period of time, the stock moves in your favor by two points, you will make approximately .9 (.5+.4)
while if the stock moves against you 2 points, you will lose 1.1 (.5+.6).
i know there are lots of other factors to consider such as the option writer will win if the stock just sits there. that, however, is very difficult to forecast.
regards
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