I read somewhere that only the Call and Put writers make money, those who trade them are sure to lose more than they gain. How does that work? It would be nice to know the mechanics of writing calls or puts... Can anyone here share their views?
Trader, this question comes up quite often. I would guess there are some threads already with a bunch of back and forth - try searching for them. The more moderate view would be that often Put and Call sellers can make money, but if they aren't careful, they can get clobbered in a bad day, week, or month. Call and Put buyers can lose money, but might make it up in a trade that goes their way. And then there is of course the fact that most option sellers do some buys and most buyers do some selling - the difference is Net Short or Net Long. Many sellers tend to hedge their selling by buying other options and making things like Long Iron Condors. Other sellers may not, but may have their trigger fingers to adjust their position for any big move. If anyone tells you that option sellers always do good, please check this by posting a new topic asking for sellers to talk about any bad trades or large losses they have had! I don't know how many people will honestly answer the question, but maybe some will. I am not against either selling or buying per se. I think it is a personal choice when you get down to it with your comfort level, etc. Realize if you want to mostly sell options you better get a good understanding of how margin works, and what early exercise is and how to predict and and what to do, etc. JJacksET4
It's profitable until it's not. On a more serious note, as others have pointed out, option sellers can be profitable for a long time and then comes that one big move against you that wipes out months, if not years, of profits. The key is very strict risk management and proper position sizing. Taken at face value though, option selling is not superior to option buying, and vice versa.
lol. I buy risky stocks and sell calls, or I'll sell cash-secured puts. Most of the time I would make more money if i hadn't sold the options- but i do it to protect myself- I'm a risk-averse investor.
I sell both calls and puts. When I sell calls it is mostly covered calls and puts can be naked or I will sell spreads to minimize my losses. You make money most of the time, I would say 80% or more. The problem is you can make one dollar on an option contract 4 consecutive times then lose five dollars on the next one so risks are still there. You win more often but loses can be bigger. You just have to watch your trades and make adjustments to minimize losses. That being said I think it is a conservative approach and I have done pretty well in this market so far. When I do covered calls it is on stock I want to keep and when I sell puts it is on a stock I wouldn't mind buying and you do it at a discount to the current price.
Do you always hedge your shorts to protect against fat tail disasters, e.g. short put and long DOTM put?