Free Online Trading Lessons Archives
Getting Started in Option Selling part I
Learn to sell options on futures with DeCarley Trading
Click on the thumbnail image below to watch this video on commodity option selling.
The characteristics of unlimited profit potential and limited risk lure traders to long options but we argue that limited risk doesn't necessarily mean less risk. In fact, it is quite possible that option buying is far riskier than option selling simply due to the probability of success that each strategy faces. In other words, although losses are limited to the premium paid plus commission for option buyers, it is highly likely that the trader will lose most or all of the value of the option. I believe, most traders would agree their account would be better off had they sold every option they purchased and this isn't a coincidence.
The mechanics of options are similar to those of an insurance policy and are, therefore, priced to lose. An insurer stands to profit over time in exchange for accepting the risk of a claim being made on a policy; similarly, an option seller hopes to garner a return in exchange for exposure to the risk of taking the opposite side of the buyer. Also similar to insurance companies, option sellers face the possibility of substantial losses should a catastrophic event occur (think hurricane Katrina or the flash crash). Nonetheless, overtime insurers have managed to survive adversity and we believe prudent option sellers could face similarly optimistic prospects.
In our opinion, option selling is one of the most attractive forms of trading but proper risk management techniques, appropriate timing and discipline are a must as the risks are high. This is a "must see" for anyone interested in a short option trading strategy.
Here are a few highlights of the topics covered:
- What exactly is option selling (aka option writing)?
- Comparing option selling to casino theory
- Understanding the role of implied volatility in time value erosion
- Timing is everything, even for option sellers!
Click here to sell options with an experienced broker, or to use one of our state-of-the-art trading platforms.
Don't forget, DeCarley Trading offers clients short option trading recommendations with entry, adjustment, and exit guidance!
*There is unlimited risk in option selling!