Selling premium

Discussion in 'Options' started by NKNY, Oct 15, 2002.

  1. NKNY


    I have a question as...

    I'm not really very knowledgeable in options except for basic strategies so go easy on me with the greeks ....

    If one was to sell premium in a short straddle type trade, is it better to sell out of money or in the money options. For example... lets assume SPX is at 875 and one would want to short a straddle. Should one sell the 950 in the money put for 72.90 and the in the money nov 825 calls for 70.80 giving a total income of 143.70 and a cushion of 70 points either way while you wait for time to decay prem over couple of days.

    The flip would be to sell a 950 out of money call for 7.10 and 825 put 12.90...both out of money , again market is trading 875 so we have some cushion. which way is safer and why ? Which has greater time decay.

    Also on another note...any good programs to simulate whit if scenarios...


  2. nugya


    I think you mean strangle as with straddle you sell the same strike PUT/CALL.


    I personally do near OTM strangles. as a seller I do not worry to much about the greeks nowadays.

    Selling premiums are OK as long as you are aware of the maximum risk you are taking and you are comfortable with it

    good luck
  3. NKNY


    Yes you are correct , I meant the strangle....

    Also, thanks for the link.....

    I myself am leaning towards out of money play. I think time should decay faster due to there being no intrinsic value... But again this is just an assumption...

    thaks again

  4. dreamer


    I prefer to put on a short straddle at the money. That way, one hedges the other. Otherwise, you either give up too much time premium or give away too much ITM.

    Good luck trading,

    Bob on whidbey Island

    "Don't confuse effort with results"
  5. maglia rosa

    maglia rosa Guest


    you amittedly recognize that you are not very knowledgeable on options. That's good, as long as you keep reminding yourself of that fact.
    We can go easy on you here with the greeks and with anything else, but the market certainly won't go easy with your money and rip you apart if you don't know what you are doing and why you are doing it.

    First of all, where did you get the prices in your example from? With the SPX at 875, if you want to sell the 950 puts at 72.90, please let ME be the buyer, I'm a 72.90 bid for a million of these (in any month, but preferably the more out, the better [for me] Let me know if we have a trade). Ignoring the reversal/conversion value (the present value of interest - dividends, which in the case of SPX is currently negative), the 950 put is worth at least 75.00 when SPX is at 875. That's parity.
    If you sell this put for 72.90, you're not selling ANY premium (no volatility value), and you're even selling below intrinsic value. Not a good trade.

    If you can sell the 950 call at 7.10, that would be much better than selling the 950 put, since there is no intrinsic value (parity) to the call, so all of the 7.10 is time/volatility value. Here, you'd be actually selling premium.

    This just as a money-saving teaching lesson.

    To your actual question:
    The risk is pretty much the same to both of these short strangle positions.
    Usually, if you sell the OTM options, it's called the "strangle", and if you sell the ITM options, it's called the "guts". The difference is how much money you collect up front, and this difference is pretty much fixed through the theoretical relationship between the strangle and the guts.
    The relationship comes from the theoretical value of the box, which is basically the difference of the strike levels (adjusted by the difference in reversal/conversion value on each strike level, to make it more complicated). You can also just think of it as the sum of the amount in the money of the 825 call and the amount in the money of the 950 put.
    So you collect more money up front from selling the guts, but at expiration you will also pay more, since you're giving back more ITM value. Overall, the risk of the two positions is exactly the same.

    So, the guts should trade about 125 (over where the strangle trades. With the prices you are giving, the guts are bid 123.70 over where the strangle is bid.

    As a guideline, since the guts is bid less over the strangle than it theoretically should (125), you would want to sell the strangle here, rather than the guts. Also, if the bid-ask spread is tighter for the cheaper options than for the more expensive ones (or ideally, if you can hit public bids off the order book), you can get away with a better price for your short vol position.

    As for time decay, both the strangle and the guts have about the same (not exactly the same, but pretty close). This is taken care for by put-call parity (or the box too, if you will). The theoretical decay in the 950 calls is the same as in the 950 puts, since the 950 puts is basically parity plus the call minus reversal/conversion value.

    You see, we haven't even talked greek yet, and it's getting pretty complicated already...
    I hope this helps for now, let me know if there is anything else.
  6. Agree.

    But, it is not that simple ...
  7. Maverick74


    I suggest anyone who is interested in selling premium to visit the graveyard in Chicago on 440 South LaSalle St. It is full of dead floor traders who made their living selling premium.

    Of course most of the guys on this board are smarter then those dumb guys on the floor right. What the hell do they know. Good luck in your pursuit of selling premium and may no black swans be in your future. Remember it only takes one.
  8. Opinions are one thing...Indictments are another...This "one size fits all" mentality going on around here is a bit tired...

    And you know what...while the guys who are down visiting the 440 South LaSalle St graveyard, maybe they should go over and visit the 30 South Wacker St graveyard too...Cause there are just as many corpses over there from guys who had too much size on prior to an FOMC spike, a news event, etc...
  9. Selling premium isn't difficult as long as one manages the risk. If one makes the rules and follows them, there is great opportunity without the risk of blowing up.

    Good trading.
  10. dreamer


    Quite right, metooxx, it's not that simple, however that is the start and where one goes from there is according to their methods and plan.

    Good luck trading to all,

    Bob on Whidbey Island

    "Don't confuse effort with results"
    #10     Nov 18, 2002