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selling options

  • #21
  • Jan 29, 2006 6:14pm Jan 29, 2006 6:14pm
here is what the P/L graph looks like for the SPY options. you said you would sell the 136 calls, but i could only see a decent bid for the 132 calls. thats what this chart is of. the red line is the expiration graph, and the blue line is the realtime graph. see the difference?
Attached Image
Relax and be happy.
  • #22
  • Jan 29, 2006 8:44pm Jan 29, 2006 8:44pm
Merlin,

First of all thanks for drawing a graph for me but if you could explain a bit how it works. What exactly am I looking at here.

Thanks!
  • #23
  • Jan 29, 2006 9:36pm Jan 29, 2006 9:36pm
New here,

But..... I completely agree with MERLIN.

John you need to take Merlin's advise, you MUST be hedged against any SHORT NAKED CALLS/PUTS, especially CALLS.
  • #24
  • Jan 29, 2006 9:42pm Jan 29, 2006 9:42pm
But I'm talking about calls/puts that are deep outside of the money and about two-three months until expiration.
  • #25
  • Jan 31, 2006 5:51am Jan 31, 2006 5:51am
Quoting johns
But I'm talking about calls/puts that are deep outside of the money and about two-three months until expiration.
This can still be a dangerous game. At the very least, take a look at what the historical volatility is for the stock. Then compare this value to the implied volatilty for the option you want to buy or sell. If the IR is higher than the HR, you're better off selling options (as long as you're covered just in case) and buying if the IR is lower then the HR (this is a rule of thumb and other criteria should go into your decision making). For Google, for example, the volatility is very high, so you'll pay a huge premium for the pleasure of buying any kind of option. Second thing is how far is the expiry date for the option you have in mind. This is one of the "greek" values typically calculated for options called the "Theta" which deals specifically with time decay. Obviously the closer the expiry date, the better it is for you if you're the one selling the option especially if the option way out of the money. There are other things to consider but these two certainly spring to mind.
  • #26
  • Jan 31, 2006 11:44am Jan 31, 2006 11:44am
I'm not going in stocks and going to be selling options on futures.
  • #27
  • Jan 31, 2006 12:07pm Jan 31, 2006 12:07pm
Quoting johns
What exactly am I looking at here.
LOL! john, you should know be able to draw this graph by hand before selling (or buying) options!!! this is a fundamental stuff man. my first suggestion would be to read and complete "The Options Workbook" by Tony Saliba. then read Natenburg's book. this is essential knowlege, and without it you are mearly gambling. its a long process but so it is for all things worthwhile. good luck buddy.
Relax and be happy.
  • #28
  • Jan 31, 2006 4:02pm Jan 31, 2006 4:02pm
Quoting merlin
LOL! john, you should know be able to draw this graph by hand before selling (or buying) options!!! this is a fundamental stuff man. my first suggestion would be to read and complete "The Options Workbook" by Tony Saliba. then read Natenburg's book. this is essential knowlege, and without it you are mearly gambling. its a long process but so it is for all things worthwhile. good luck buddy.
another good one is The Complete Option Player 4th edition by Kenneth Trester. a long read and tons of info.
  • #29
  • Jan 31, 2006 7:09pm Jan 31, 2006 7:09pm
Quoting johns
I'm not going in stocks and going to be selling options on futures.
doesn't matter. same principles apply.

have a look here: http://www.investopedia.com/articles.../02/031102.asp Again, there's more to it than what's on this page, so be careful.
  • #30
  • Jan 31, 2006 10:52pm Jan 31, 2006 10:52pm
I'll give you an example. You go into a silver futures contract lets say the market swings against you 50 cents and you've placed a stop 10 cents off. Lets say it explodes up 50 cents you're not going to be stopped out in time, you're going to lose $2,500.

Now let's say you wrote a silver may call option at $15. The same thing happens the market explodes 50 cents. That option you wrote is now worth about $320. My point is this there is a lot more security in writing options outside of the money and about 2-3 months until expiration. I would place my exit for the option when the price of the option is worth $500. In order for the $15 call option to be worth $500 silver would have to explode to $14.50, even if silver reaches $15 at expiration it's still pretty much workthless.

Do you see my point writing outside of the money carries a lower level of risk than going into the futures marekts.

If you use this principle for ten different markets and you write 10 different options for $250 each, you just made $2500 each month while minimizing your risk.

Now if the market really starts to move I will be stopped out at a $500 loss which is nothing.

What your basically doing is acting like a casino, your taking bets on a long shot that more than likely isn't going to deliver.
  • #31
  • Jan 31, 2006 10:57pm Jan 31, 2006 10:57pm
Quoting merlin
LOL! john, you should know be able to draw this graph by hand before selling (or buying) options!!! this is a fundamental stuff man. my first suggestion would be to read and complete "The Options Workbook" by Tony Saliba. then read Natenburg's book. this is essential knowlege, and without it you are mearly gambling. its a long process but so it is for all things worthwhile. good luck buddy.
I'll give you an example. You go into a silver futures contract lets say the market swings against you 50 cents and you've placed a stop 10 cents off. Lets say it explodes up 50 cents you're not going to be stopped out in time, you're going to lose $2,500.

Now let's say you wrote a silver may call option at $15. The same thing happens the market explodes 50 cents. That option you wrote is now worth about $320. My point is this there is a lot more security in writing options outside of the money and about 2-3 months until expiration. I would place my exit for the option when the price of the option is worth $500. In order for the $15 call option to be worth $500 silver would have to explode to $14.50, even if silver reaches $15 at expiration it's still pretty much workthless.

Do you see my point writing outside of the money carries a lower level of risk than going into the futures marekts.

If you use this principle for ten different markets and you write 10 different options for $250 each, you just made $2500 each month while minimizing your risk.

Now if the market really starts to move I will be stopped out at a $500 loss which is nothing.

What your basically doing is acting like a casino, your taking bets on a long shot that more than likely isn't going to deliver.
  • #32
  • Feb 2, 2006 5:57pm Feb 2, 2006 5:57pm
Here kitty... kitty.. kitty...
Here you go firehorse.. your selling options thread..
  • #33
  • Feb 2, 2006 9:50pm Feb 2, 2006 9:50pm
Thanks, much appreciated.
  • #34
  • Feb 2, 2006 9:57pm Feb 2, 2006 9:57pm
Quoting johns
Thanks, much appreciated.
Glad to be of help.. Was fun looking for it..
I think notification of thread transfers is one of the "to do" items in Merlin's list..

But I do think that whoever moved it should have informed you... No offense to the mover though.. Just a little reminder.. <peace>
  • #35
  • Feb 24, 2006 8:12pm Feb 24, 2006 8:12pm
I have a lot to learn regarding options, though they seem to be more safe than actually investing in the stock itself. Isn't it true though that a majority of all options expire worthless? Does this matter? Can you profit from it?
  • #36
  • Feb 24, 2006 9:04pm Feb 24, 2006 9:04pm
Quoting Adrian548
I have a lot to learn regarding options, though they seem to be more safe than actually investing in the stock itself. Isn't it true though that a majority of all options expire worthless? Does this matter? Can you profit from it?
Have not played with options yet but if you're new to it, I'd suggest a good introduction at investopedia:
http://www.investopedia.com/university/options/

I got this stats also from the above link:
"According to the CBOE about 10% of options are exercised, 60% are traded out, and 30% expire worthless."

Hope this helps,
East
  • #37
  • Feb 25, 2006 4:30am Feb 25, 2006 4:30am
Quoting eastmaels
I got this stats also from the above link:
"According to the CBOE about 10% of options are exercised, 60% are traded out, and 30% expire worthless."
This estimation factors in all the options being traded, both in the money and out of the money...Literally, you can't exercise an out of the money option...The fact which many know is that usually, 80-90% of the out of the money options expire worthless....At least, I heard this somewhere


Thanks,

Nader
  • #38
  • Feb 25, 2006 4:35am Feb 25, 2006 4:35am
Quoting narafa
This estimation factors in all the options being traded, both in the money and out of the money...Literally, you can't exercise an out of the money option...The fact which many know is that usually, 80-90% of the out of the money options expire worthless....At least, I heard this somewhere


Thanks,

Nader
That's one stat I have to look out for..
  • #39
  • Mar 5, 2006 5:30am Mar 5, 2006 5:30am
johns: have you considered the huge amount of margin a broker is going to require for each contract to sell naked? Did you know that there is unlimited risk for selling naked calls regardless if you sell out of the money? Sure, you may hit some home runs, but that one time the market turns against you could bankrupt you. The best way to trade options is with spreads (buying and selling the same contract at diff. strike prices). You can do either credit spreads or debit spreads, and variations of them. Your risk is limited to your premium and your premium is much lower than buying options. I really suggest you educate yourself on this subject as Merlin suggested.
  • #40
  • Mar 6, 2006 12:09pm Mar 6, 2006 12:09pm
As we are talking about selling options on future contracts over here, I would like to ask if anyone know how margin for selling naked options on futures is calculated?? I have sent an email to Interactive Brokers and they replied with a link from the CME website which describes the SPAN method of margin calculation....Anybody have an idea how this thing works???


Thanks,

Nader
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