Free Commodity Futures & Option Trading Tips |
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"Dispelling the Myths of Selling Options" |
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TRADERS EDGE NEWSLETTER for May 17, 2006
Greetings Traders, thanks for dropping by for today's Traders Edge! There are quiet a lot of myths concerning selling option premium that I want to clear up for you today. Selling option premium is a very viable part of low-risk option trading. We incorporate option selling into our trading plan for option spreads and creating free trades to reduce the cost of the position and in many cases get trades with zero cost. Myth #1. Selling option premium has an unlimited risk factor. The only way that you subject yourself to the unlimited loss risk factor associated with selling options is if you sell just a single option. Example: If you sold a 3.00 July corn call option for $500 you collect $500 in premium. By doing this you expect that July corn options will expire with July corn futures under 3.00. In this case the option expires worthless and you keep the $500 in premium you collected. But if July corn futures moves higher beyond the 3.00 strike price of the option you sold, you begin losing $50 per each one cent move above the 3.00 call strike price. Dispelling Myth #1: Never sell a single option! Always purchase a lower strike price option and sell a higher strike price option as a spread. Example: Let's say July corn is trading at 2.80 and you expect the market to move higher. You could purchase the July corn 3.00 call option for $500 and sell a July corn 3.50 call option for $250. The total cost to you for this trade in $250. You eliminate the unlimited loss factor because you purchased a lower strike price 3.00 call. Since the 3.00 call you purchased is closer to the actual July futures price of 2.80, it will always be worth more than the 3.50 call you're selling. Myth #2: What if I wanted to close out the above spread position or any other option for whatever reason but the trader doesn't want to sell me back the 3.50 call I sold him/her? That's a reasonable assumption especially if the 3.50 call is selling for more than we sold it for. But it doesn't work that way. Dispelling Myth #2: You can close out (buy back) any sold option at anytime you wish! This is where most every beginner fails to see the power of selling options. Let me explain: When you sell an option you place an order with your broker to sell the 3.50 strike price for $250. Your order goes to the trading floor and a floor broker decides to purchase it. They in turn sell a 3.50 call to a trader looking to purchase one. In simplicity, the floor broker is a middle man for both option buyers and sellers. Your agreement is with the floor broker and not the individual trader who purchases the option from the floor trader (broker). The floor trader has an obligation to both the seller of the option (you) and to the purchaser of the option (any trader). So, if you want to buy back the option you sold, the floor trader must honor your request and they must continue to honor the sold price to the purchaser of the option. Of course the option you sold may be worth more or less than you sold it for depending on cost of the option at the time. But you can exit (buy back) any sold option at anytime prior to option expiration without having any further obligations to anyone. Option selling is just as simple as option purchasing with no additional risk. So don't let option selling intimidate you and keep you from raking in more profits by the combination of buying/and selling options. You can even make money if the market moves contrary to your plans. In my course you'll learn the simple process of selling options right down to the exact order to give your broker. Low-Risk Option Trading puts the odds of success in your favor by showing you at a glance which options in any given market are overvalued and undervalued. It shows you how to select option positions that have a minimum of 2/1 profit ratio, and many times a 5/1 probability of profit verses risk. In fact, it's not uncommon to make 300% and more on your investment in 30 days when you trade options the low-risk way. It shows you how to trade the free trade strategy where there is NO risk of loss regardless of the underlying market's price direction. This relieves the stress of managing positions because there is very little or no trade management once the free trade strategy is completed thus allowing you the time to look for other trading opportunities without worrying about every price tick in the markets. When you
know what to do...and do it, you find that this business is very rewarding.
And after 28
years of full time trading, I’m positively sure that there is no better trading
method than Low-Risk Option
Trading for the short funded beginner!
I show course members how to trade strategies that in most cases require no futures margin to risk, define the maximum risk BEFORE entering the trade, and some strategies that GUARANTEE that you make a profit even if the futures price doesn’t move as you expect. Happy Trading, Archie
Johnson P.S.- If your goal is to make commodity trading your full-time
source of income, you'll find everything you need to make it happen on this page: http://www.vtuniversity.com/options.html Traders Edge Resources:
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