• Create BookmarkCreate Bookmark
  • Create Note or TagCreate Note or Tag
  • PrintPrint
Share this Page URL
Help

Chapter 5. Advanced option strategies > Covered option writing

Covered option writing

The advantage and attraction of buying options is that your risk is limited and pre-determined, with the profit potential unlimited. Be aware, however, that most options expire worthless, and the premiums eventually disappear. Therefore, buying options is generally a losing proposition. This is not to say you cannot make good money in a major bull or major bear market, but be advised that most professionals primarily sell options (generally to the public). They might hedge these sales with a ratio of long or short futures, but the public generally likes to purchase premium. The advantage of selling options is that you can capitalize on the time decay of options. Because the premiums that people pay for options eventually rise to option heaven, the option seller gains these premiums. Writing options is generally a winning strategy; however, the big disadvantage is that the risk is unlimited, while the profit potential is limited to the premiums received. When option premiums are high, the general rule of thumb is that it is better to sell options than to buy them.

The advantage of futures is the unlimited profit potential, but the risk is theoretically unlimited also. You should, therefore, use risk-management techniques (stops). Stops are not foolproof, but they generally work efficiently. The main problems with stops is that they can be filled away from your intended risk level at times, and in a volatile market, you can be stopped out only to have the market eventually go back your way. On the other hand, if you do not have stops, you cannot predetermine what your risk is.


PREVIEW

                                                                          

Not a subscriber?

Start A Free Trial


  
  • Creative Edge
  • Create BookmarkCreate Bookmark
  • Create Note or TagCreate Note or Tag
  • PrintPrint