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Re: Selling Options Profit/coral/all

One thing that is rarely talked about in written option trades is the "tie down" that one effectively has until expiry.

I can buy an option, sell it for double a week later, make a closing sale, and see that same option expire worthless when the market settles back to where it started by expiry.

A writer makes the maximum profit too in this scenario, but gets a few sleepless nights.

Did I lose 90% of the time because this example involved "my option expiring worthless"?

Of course not! I had the opportunity to make a closing sale at a nice profit. People who are short options don't really get that chance, as on a big move against the option holder, the writer still has to pay to close out their short option position, and of course it is hard to get a fill after the market has moved down (for the individual option) as who wants to buy at 20, see the price drop to 5 and then sell to a writer wanting to cover their short? - Not going to happen is it!

The writer really needs a worthless option expiry every time, and misleading statistics imply that since 90% of options expire worthless, then a writer is going to make a profit 90% of the time. Ok, if you can meet the HUGE margin calls halfway through the position's running life on a particular big outside day eh? I say HUGE because I trade futures in single lots, but trade option in 10 lot clips. If I wrote 10 March 1400 bean ATM options, I'd be looking at a loss of $35,000 on a single day's limit-against move - assuming that I got filled around overnight levels on the underlying. I don't write bean options unless I hold ITM options that make my losing like that impossible, such as me being long 10 March 1350 calls. Such a strategy would be to profit from a stagnant market util expiry. I could just take the profit on the 1350's of course IF it is worth my while doing so. (I like to get a bit of volatility premium when I make closing sales, regardless of how much time is left!)

For a buyer to get a good value option, he needs a daft writer who'll fill them at a price that seemingly looks good on the writer's books. If the buyer's bid doesn't get filled (23 times out of 24 in my experience) then the risk to the bidder is ZERO. A writer on the offer can find themselves very quickly in deep water should the underlying make a big move the option's way, requiring the writer to constantly monitor their offer in the market. Dunno about most folks, but that doesn't smack of "good times" to me, so the only time I'll write an option is against an already held underlying of some fashion coupled with a volatility spike in the series I'm trying to write. Typically, that means most of my option trades occur in the last week before expiry, and I'll make trades such as "legging in" ie writing an at-the-money option against an in-the-money option using a 1:1 ratio.

I have decent adverse movement protection, I keep the first part of the favourable movement, I collect the premium regardless, and of course I don't have to worry about disruption, as we're talking about less than a week to expiry. This works very nicely indeed with FTSE options, as they are even euro-style excercise, thus making disruption impossible.

I bet very few of you folks out there trade anything european derivative wise!

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Re: Selling Options Profit/coral/all