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Am I overlooking the risk?
Started:March 23rd, 2012 (01:44 PM) by trader0303 Views / Replies:2,412 / 11
Last Reply:February 19th, 2013 (10:52 AM) Attachments:0

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Am I overlooking the risk?

Old February 19th, 2013, 10:44 AM   #11 (permalink)
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As a general rule of thumb, selling premium works well, until one day when something unexpected happens and it works so totally against you as to wipe out all profits you were able to achieve to that point.

In your particular example, any big move against either short put or call, will wipe out any premium you made and put you in the hole. Let's say you sold the put for $1300 and the call for $1170. Let's say one day a piece of news causes price of the underlying instrument to jump so that call is now worth $5000 and because the price jumped you were unable to get a fill on your stop order to buy the stock. you're now sitting on a $2530 loss in the options and you still need to buy the stock in case it continues to move against you.

Or, instead of any big moves happening, prices could bounce around between the strike prices and the middle point, causing you to excecute your strategy of buying and selling shares a bunch of times. Do that enough times and any profit you have from selling the options is erased by losses incurred on the stock.

Last edited by mwtzzz; February 19th, 2013 at 10:51 AM.
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Old February 19th, 2013, 10:52 AM   #12 (permalink)
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