subject: Trading Options Strategies: Option Selling [print this page] A lot of traders want to buy options in an effort to maximize gains and limit losses. Trading options strategies becomes normal today. Limiting losses to the purchase price of the option seems ideal, except for one major flaw, which is time decay.
Chicago Mercantile Exchange has estimation that over 80% of all options is expiring worthless. Those who are selling options or option writers collect the premium paid by the option buyer. Trading options strategies option writing is often used for hedging purposes and reducing risk. The option writer has unlimited risk and yes, a limited profit potential. You see, trading options strategies are not too perfect at all. The premium of the option minus commissions is just insignificant. In appropriate conditions that are necessarily considered are selling out-of-the-money options instead of buying them. Why?
In trading options strategies, when selling out-of-the-money options, time value works beneficially. The buyer of the option pays a premium for that option. The longer the buyer holds the option, more time decay works against him more importantly as the option approaches the expiration. Over time, the option will lose 100% of its time value.
Along with time decay, trading options strategies in option selling make small traders to often purchase options. According to history, small traders, as opposed to the large commercial or fund traders, are on the losing side of the trade. Statistics show that small traders tend to buy options, as among the most common is the call options.
Options sellers do not have to be concerned so much with the place where the price will go. They actually need to consider more importantly where the price will not go. Trading options strategies need to focus on the highest probability of expiring worthless. Heritage West has the fundamental and technical analysis to project the general direction of the fundamental futures market, where options will be sold.
With trading options strategies, you surely know how important time value is. As an option seller, time value is you product. As time passes, the option's time value will erode. The first stage may go slow, but it will later on accelerate towards the end. The movement in the futures market can temporarily have an effect on the value of the option too. Higher movement can temporarily propel the value of the option higher. Futures prices moving lower will hasten the drop of the option.
In trading options strategies, volatility is among the most important factors to consider when determining which options to write. It is the measure of the rate and magnitude of change in the price of an option, relative to the change of the underlying futures contract. Once volatility is high, the premium on the option is directly proportional to it. There are option traders who dont understand how volatility influences the price of options and how to utilize volatility to gain profits.
Trading Options Strategies are too sensitive issues to study. Nonetheless, once you come to understand any of them, as starting with option selling, it will be a good start for your success.
by: Kian Elllis
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