S.O.S. - Short Option Strangles
- Written by Carley Garner
Why Short Option Trading in Commodities?
Imagine how much better off you may have been had you sold every option that you have ever purchased. While stories surface from time to time of traders that have attained huge profits from a single long option play, these tales are rare in comparison to those in which traders have lost some, or all of the premium paid for an option.
Selling options for the sole purpose of premium collection appears to be irrational to the novice trader. After all, a strategy that involves unlimited risk and limited reward doesn’t appeal to most. However, a closer look into the reality of the options market reveals an opportunity that even the most skeptical cannot ignore.
In a sense, option buyers are throwing good money after bad in a hunt of that one big market move that could “change their life”. Given the assumption that markets spend approximately 80% of the time trading in a range, it is easy to see why few traders experience the abnormal returns that drew them to commodities in the first place.
By design, options are a depreciating asset. Similar to the way that a new car buyer will witness the value of their purchase diminish once the automobile is taken off of the seller’s lot, an option buyer will experience time decay with every passing minute of the option's life.