I don't get involved because in general I think buying options is foolish and selling them is much more like the insurance business than trading from my perspective.
With that said it is really impressive that you navigated the crisis. I might have to look closer into this as you are basically selling insurance to customers that by their nature have to be extremely over insured..especially post crisis.
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I like to look at my option selling like this. I am selling flood insurance. But I am not selling insurance to people next to the river. I am only selling to people near to the top of the hill. Those that have very little chance of flooding.
The percent of the options that I sold that expired worthless the last couple of years is over 90%.
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Good info. Thank you.
Which broker do you use?
Can you show an example with one of the liquid products? How do you determine how far OTM you sell?
Do you sell systematically or wait for pushes in IV?
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I mainly use OptionsXpress (OX). I use Open E Cry for certain electronic options like coffee and milk that OX only sends the orders to the pit.
I usually sell options that have <100 days till expiration.
Oil (CL) is one commodity that I sell. I usually try to stay at options that have about a 0.03 Delta or lower. So an Oct 73 put would be the highest I would go for a strike price for Oct puts. This option expires 9/15/11. 48 days. The Initial margin is $1019. The premium is 0.20 or $200.
Is oil going below 73 in the next 48 days? I doubt it. But it doesn't have to go that low to cause you to lose money and bail on the contract. Because if oil were to drop to less than 90 today the premium would rise dramatically (loss to the seller) and the margin would increase. That is why I keep 2/3 of my money in cash to ride out the market going against me.
So 1019 margin, 2038 cash, $200 option premium, minus fees, equals a 6.4% return in 48 days.
The biggest thing about selling options is you are not trying to predict where prices are going. You are trying to predict where they are not going.
So if oil stays flat at 97 for the next 48 days, you make money. If oil falls slowly to 85 you still make money. The risk is a huge change in price in a short period of time. That is why you need plenty of cash to ride out the large price movement. The vast majority of options I sell never go into the money. You just have to have enough cash to hang on.
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If you sell an Oct 73 oil put and on the options expiration day of 9/15/11 the Oct oil futures contract settles above 73, the option expires worthless. You don't have to trade out of it. You keep all of the premium you sold it for.
Just like if you sold flood insurance and the person buying it doesn't have a flood before the next payment is due, you keep the premium he paid.
If oil settles below 73 on 9/15 your short put will then turn into a long Oct oil future. Then you will need to trade out of the future. But I have never allowed that to happen.
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