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The Complete Guide to Option Selling by James Cordier and Michael Gross
Week 2
#WeekendReading #LearningTogether
Week 2
#WeekendReading #LearningTogether
https://twitter.com/IMRiskManager/status/1025371602702094336
https://twitter.com/IMRiskManager/status/1027908065528434689
1 Just because an
option has high volatility does
not mean that it is a good option
to sell. And just because an
option has low volatility, it
does not mean that it is a poor
option to sell.
option has high volatility does
not mean that it is a good option
to sell. And just because an
option has low volatility, it
does not mean that it is a poor
option to sell.
2 Unless you love
to gamble, buying options is a losing proposition.
to gamble, buying options is a losing proposition.
3 When one sells an
option, one collects that premium, but
one now holds the open position with
potential liability. For this reason, the
seller of a put or call is required to put
up some collateral to hold the position...
option, one collects that premium, but
one now holds the open position with
potential liability. For this reason, the
seller of a put or call is required to put
up some collateral to hold the position...
4...This collateral is not a cost. It is
simply a “deposit” made with funds
from one’s trading account and is
known as margin.
simply a “deposit” made with funds
from one’s trading account and is
known as margin.
5 After a trader understands the concept of margin, the next key factor
that he must understand is the fact that the margin requirement for
the trade is changing and being readjusted constantly, literally on a
daily basis.
that he must understand is the fact that the margin requirement for
the trade is changing and being readjusted constantly, literally on a
daily basis.
6 Futures margins are determined by a formula known as Standard
Portfolio Analysis of Risk (SPAN).
Portfolio Analysis of Risk (SPAN).
7 SPAN is a formula set by the exchanges
and is based on the time value left on the option, the amount by
which the option is in or out of the money, and the volatility of the
underlying contract.
and is based on the time value left on the option, the amount by
which the option is in or out of the money, and the volatility of the
underlying contract.
8 It has often been said that selling options is similar to operating an
insurance company. Buyers of car insurance pay insurance premiums
to an insurance company to insure their vehicles. They pay these
premiums month after month...
insurance company. Buyers of car insurance pay insurance premiums
to an insurance company to insure their vehicles. They pay these
premiums month after month...
9 ...In most cases, the driver never has an
accident, and the insurance company keeps the premiums as profit. . If
a driver does happen to have an accident, the insurance company
must pay up.
accident, and the insurance company keeps the premiums as profit. . If
a driver does happen to have an accident, the insurance company
must pay up.
10 Long-term and sustained
price movements are caused by the underlying base fundamentals of
a particular commodity. And while technical indicators may reflect
these fundamentals, they do not determine the ultimate direction of
the market.
price movements are caused by the underlying base fundamentals of
a particular commodity. And while technical indicators may reflect
these fundamentals, they do not determine the ultimate direction of
the market.
11 In a nutshell, this simple (option selling) strategy is outlined as follows:
1. Select markets with very clear long-term bearish or bullish
fundamentals. While it is preferable that the market also will
be in a long-term trend reflecting these fundamentals...
1. Select markets with very clear long-term bearish or bullish
fundamentals. While it is preferable that the market also will
be in a long-term trend reflecting these fundamentals...
12 ...it is
not absolutely necessary to be a successful option seller.
2. Sell options with two to six months of time value in favor of
these fundamentals at distant strike prices.
3. Set a risk parameter on each option that you sell and sit back
and wait.
not absolutely necessary to be a successful option seller.
2. Sell options with two to six months of time value in favor of
these fundamentals at distant strike prices.
3. Set a risk parameter on each option that you sell and sit back
and wait.
13 Pros and
commercials often do hold long option positions, but this is often part
of a larger combination of option and/or futures positions or some
sort of hedging situation.
commercials often do hold long option positions, but this is often part
of a larger combination of option and/or futures positions or some
sort of hedging situation.
14 If you are selling at-the-money or close-to-the-money options, this risk is much closer and is much more immediate
than it is if your strikes are considerably farther away from where the
market is trading.
than it is if your strikes are considerably farther away from where the
market is trading.
15 All other things
being equal, an option will show its maximum time deterioration
within the last 30 days of its working life.
being equal, an option will show its maximum time deterioration
within the last 30 days of its working life.
16 Remember, the market
doesn't have to move in the direction that most favors the trader. It can
move sideways or even against the trader for a while, & the option
can still expire worthless if the market doesn't reach her strike...
doesn't have to move in the direction that most favors the trader. It can
move sideways or even against the trader for a while, & the option
can still expire worthless if the market doesn't reach her strike...
17 ...The
trader only has to pick where it won’t go, not where it’s going.
trader only has to pick where it won’t go, not where it’s going.
18 Market volatility can drive option premiums outrageously
high and often make them extremely overpriced. This can be a very
lucrative time for option sellers. The downside is that the market will
remain vulnerable to additional volatile moves in either direction.
high and often make them extremely overpriced. This can be a very
lucrative time for option sellers. The downside is that the market will
remain vulnerable to additional volatile moves in either direction.
19 If there is a discernible discrepancy between the num-
ber of open contracts in puts versus calls or vice versa, there is a good
chance that the public is favoring one side of the market. Agood rule of
thumb—if given the choice—is to fade the public.
ber of open contracts in puts versus calls or vice versa, there is a good
chance that the public is favoring one side of the market. Agood rule of
thumb—if given the choice—is to fade the public.
20 Delta is the amount by which the price of an option changes for every
dollar move in the underlying contract. The delta will give you a good idea of how far the
option price will move in relation to the underlying market.
dollar move in the underlying contract. The delta will give you a good idea of how far the
option price will move in relation to the underlying market.
21 It is our recommendation that you seek options with low to very
low deltas when you are selling. They will have the lowest chance of
ever going in the money.
low deltas when you are selling. They will have the lowest chance of
ever going in the money.
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