collecting premium / cashing out

Discussion in 'Options' started by konviction, Oct 29, 2011.

  1. Been reading "get rich with options" and I'm sold on the idea that selling is much more successful and profitable that buying.

    But I have a question. If I collect the premium from the buyer upfront, why not just turn around and close the trade out and run with the money. Obviously I must be missing something here, as this wouldn't be fair to buyers.
     
  2. Lucias

    Lucias

    Takes time for the premium to expire...

    So, the premium is built into the option. This little fact is also used by savvy buyer of options who will factor in the premium when considering future potential value of the option.

    Hope that makes sense.. but you only collect as much premium as you pay for in risk (i.e time held short)

    Hope it makes sense.. Not an options genius here. :)
     
  3. Dael

    Dael

    As said above, you have to wait for your option to expire in order to get the full premium into your pocket. Say you sold the option with 100 price quote and get $100 premium. If you want to get out right now, you'll buy it back with the same 100 quote (even more due to bid/ask spread) getting small loss. So you have to wait while the quote will be zero (for week, month, etc), and just in that right moment you'll get the whole $100.
     
  4. Selling isn't more successful than buying. Or vice versa. The ones who make money are those who have good timing, selection and money management... or even just dumb luck :)

    As for running with the money, the premium received isn't a gift. You're selling something that has value. Unless its value has declined, there's no profit.
     
  5. cfelicio

    cfelicio

    you are selling options and buying risk. if you want to survive in this game on the long run, you better be prepared to when something bad happens and your option goes deep ITM. If you are over leveraged (1st newbie mistake), then you blow up! :)
     
  6. I can't fathom a worse title than, "Get Rich with Options!" You will blow-out. Buy Natenberg or Baird's book and read it a few times.
     
  7. Thanks guys. I guess that explains why my pnl for my naked put is fluctuating?.. because I only get the full amount at expiration day, and if the stock rises, my premium is reduced.

    As for the book, it's a bit misleading. It actually is legit. The author was an options market maker in the past and he doesn't try and trick readers into thinking they will get rich necessarily, but suggests that through leverage and proper mm, it's possible to get rich.
     
  8. He's never been an NFA member

    [​IMG]
     
  9. let me ask you a Q? If you sell an option then someone has to be buying. Right. Now, do you think that every time you sell... the buyer(s) of that options series are going to lose money?! If so what gave you that idea.

    Do you not understand the basic principle that options move in a relationship to the underlying? If not, how can you or anyone even fathom selling naked premium?!!! If you do get it, then how do you know that the hour and minute you sell the option, the underlying will move such that you stand to collect all or some of the premium you just received?! What if you sell an AAPL 405p and APPL (the next hour) or sometime this week trades to 390? Or, trades to 380? Or maybe just 397? Same with calls. You sell 410c and AAPL trades to 425 on a gap up the next day.

    What will you do with your sold options? Will you hold or close or do another strategy applicable at said time? Will you roll into a 390p? How will you know what to do? Does the get rich quick guy tell you this ?! I guess you just hold for a week or a month or more, cross your fingers and hope you don't get a margin call or liquidation; or worse yet lose all your account.

    Also do you understand that your broker will hold a margin for the options sold. Thus you are tying up that sum in exchange for the potential to make a profit from buying back the sold option as a better price.

    If you are in Chicago, I will be happy to teach you the basic principles, and how to sell weekly options against back month options.

    Won't even charge you more than dinner and drink (@ Charlie Trotter's) . lol
     
  10. ^ In short answer..

    Because the probability for a call option to be profitable must meet all the criteria, which is rare (if held to expiration).

    Plus the author says that I should never sell puts on stocks I don't want to own long term. So either way its kind of a win-win. Either I collect premium and/or get assigned and I get a discount on buying the stock.
     
    #10     Oct 30, 2011