LEARN HOW TO SELLING OPTIONS?

The Chicago Merchantile Exchange estimates over 80% of all options sold expire worthless. Now think back on your own experience when buying option and how they turned out. Did they expire, lose value right after you bought them, or maybe just broke even or a slight lose? I bet you said to yourself no one makes money in options or I wish I had sold these instead of bought them. Then why aren’t you?

An option is made up of three main factors. Time value (how much time is left tell expiration), intrinsic value (how much it’s in the money by), and volatility (speed of the market). When you sell an option out of the money, the option only has time value and volatility and no intrinsic value. With time passing and market doing what you expected it to, the options will gradually lose all it value. 

I have added a graph to show the decaying time value and how it accelerates as the expiration date comes closer.  If the underlying contract does not reach the option strike price by the expiration then the option will expire and you get to keep the premium. Decay happens fastest in the last 30 to 45 days of the option’s life.

Selling options normally will carry less risk then futures trading and you should have a higher winning percentage then buy option when done correctly. With this statement said, you must remember that all trading carries some degree of risk and you must be willing to cover this risk when trading. Remember to sell options far enough away so small swings in the market don’t make a big negative impact in your options premiums. This will allow you to ride out the small storms and focus mainly on the larger fundamentals. Some people say that the selling of options carries the same risk as futures, but I disagree. The options will gain at a slower pace and this allows you the time to strategies and make decisions on what is best for your account. Should you need to exit your trade, you will be able to, as options don’t have limits.

When selling options you don’t have to know where the market is going, but instead pick a price where you think the market won’t get to in the allotted time. If you feel the market is bullish or is in a bullish trend then you would look to sell put options and visa versa. Should you feel the market will continue in a sideways pattern or move along a general trend with out large swings, you may look to strangle the market by selling puts and calls.  By selling puts and calls you will receive some protection should the market make a large move one way or the other. When the puts gain value the calls will lose value. Giving you a better chance once again on riding out the small fundamental spike or down falls.

When selling option you must post margin, so remember to leave enough excess margin in your account to ride the storms, so you don’t end up on a margin call. If the options you sold gain value, that value will come out of your account until that options value starts to drop. Margin will also increase as the market goes against you. So it’s a good idea to keep this in mind when trying to figure out which option you want to sell and how many.

When starting to sell options, it is best to consult your broker for advise and a list of good options to sell.

If you have any questions about this strategy, please feel free to call us at 888-847-1140

- Gary Padgett, Senior Account Executive

Phone: 888-847-1140
Email:gary@futuresandoptionstrading.com  

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***The information in this article has been carefully compiled from sources believed to be reliable, but it's accuracy is not guaranteed. Use it at your own risk. There is risk of loss in all trading. Past performance is not necessarily indicative of future results. Traders should read The Option Disclosure Statement before trading options and should understand the risks in option trading, including the fact that any time an option is sold, there is an unlimited risk of loss, and when an option is purchased, the entire premium is at risk. In addition, any time an option is purchased or sold, transaction costs including brokerage and exchange fees are at risk. No representation is made that any account is likely to achieve profits or losses similar to those shown, or in any amount. An account may experience different results depending on factors such as timing of trades and account size. Before trading, one should be aware that with the potential for profits, there is also potential for losses, which may be very large. All opinions expressed are current opinions and are subject to change without notice.

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