Selling options... why is it too easy?

Discussion in 'Options' started by tdatspectral, Oct 2, 2011.

  1. Why is it so easy to make money selling options? What is the catch? I am fairly new to trading options and have much to learn. I did pretty good in Sept by buying calls and puts and selling them when the market hit a turning point. But after reading a bit I discovered that I could sell puts and calls and pocket the premium, making a guaranteed profit if I played it right. Mostly using the last week before expiration.

    If I am sure where the market is going that week, then it's easy money. If I am not sure, I could sell a spread and let them both decay, closing the one side of the spread before it reaches the strike price.

    Why is this so easy? Could effectively double my money twice a month if I was a pig (which I'm not). So what's the catch, where's the downside? The only one I can think of is if the market crashes or skyrockets while my head is turned away.

    ???
     
  2. ammo

    ammo

    thats the risk,the blow up of the put or call,its all about limited ,defined risk,
     
  3. ghl4321

    ghl4321

    hi all,

    my name is john, i'm a new trader, i would like to know how to start trading? thank you.
     
  4. hi ammo. so I could develop a contingency system as long as I keep dry powder? If the underlying blows up say 4-5 % then I could buy back that position for a loss, (the other leg would mostly compensate for loss) then sell a strike price considerably further as it would have appreciated too. As long as I stay one step ahead of the blowup, I am guaranteed profit. If it happened 3-4 days in a row, then it could potentially lose but in this market that is very low probability on the upside. It could be a potential on the downside though.

    See anything wrong with this? Thanks for your input.

    edit: or... simply create a new spread each day that moves with the market. Understand... I am talking about the last 5 days before expiration.
     
  5. IMO, you should only sell naked if you are willing to own the underlying, or take a major hit on an index. The probabilities may appear to be huge that it is "free money", but when that improbable bad day happens, it is a REALLY bad day.

    Trust me. You don't want to be having the Sunday conversation with a colleague regarding naked Bear Stearns puts you both sold on Wednesday. The actual physical pain in my gut was surprising to me. It didn't wipe us out, but it sure as hell hurt.

    Don't do it.
     
  6. ammo

    ammo

    aapl is trading at close to the mid channel
     
  7. ammo

    ammo

    the 380 straddle is trading near 36.5,the market is pricing in a worst case touch of the lower trendline,380 -36 =344,and a less fearful rally to 416,short of the upper trendline,380 +36=416,so slightly bearish form the market makers fear analysis,you could go 18 points out from the closing price,trades in 5 point increments so go 15 or 20,lets use the 365 calls and the 395 puts,sell bid bid for 53.25....now you leave that straddle locke dup at night by buying the 395 calls and the 365 puts,this is the simple way to trade the box,during the day you lift both longs or only one if the market is trending strong in one direction,you either collect the premium on the straddle or leave the one side that would lose the most covered and let the winner ride,on friday it would have been lifting the long call and leaving the put spread on
     
  8. ammo

    ammo

    a rule of thumb for trading options before everyone understood the greeks, was to hedge a 17 dollar sh put,you could buy 2 smaller puts that when added equaled somewhere in the neighborhood of 17,keep that in mind as your bias becomes strong or weak and you wish to buy small insurance or large insurance
     
  9. ammo

    ammo

    no matter where the market goes,that box will be worth $30,ideally,eventually you will be short it for 35-40 or higher and can always bid the whole position for 30 or 30.25 and get filled,this is a safe way of collecting premium in a volatile market,you need to be out or winding out the wed ,week before exp as the odds of getting assigned on one of your shorts increases and trading out of it gets riskier, requires more skill,you start looking for the next month's parameters on the stock,and put on the nov
     
  10. Mortgage the farm and give it a whirl. Let us know what the good life is like.

    :)
     
    #10     Oct 2, 2011