Parts Option
Risk of ‘unlimited Loses’ in Naked Option Selling is a Myth!
For option sellers it is disconcerting to hear people say that selling naked options is extremely risky because it carries the threat of ‘unlimited loses’. Nothing is farther from the truth! It’s a myth! It’s about time we correct this misconception and put this fear to rest.
While theoretically the selling of naked options carries with it the potential for unlimited loses, in the real world this so-called risk is controllable to such a large degree as to be meaningless. Thousands of option sellers are successfully making a good living and growing their capital doing nothing but sell naked options. The fact is, all these successful traders are employing certain safeguards or protective trading strategies that allow them to defeat this ‘unlimited risk’ factor.
Those who believe that naked option selling has the potential for ‘unlimited loses’ are obviously misguided in their belief. Selling or writing naked options when done in a disciplined manner coupled with proper protective trading techniques and sound money management is no riskier than buying options. Seasoned options traders who specialize in naked writing regard option buying as a riskier, more speculative trading strategy. Statistics show there are more traders who lose money as option buyers than option sellers.
Options are decaying assets. They lose value each day that the underlying stock to which they are attached remains unchanged or moves in a negative direction. The magnitude of daily losses depends on many factors but the primary one being the behavior of the underlying stock. An option buyer (versus an option seller) is faced with this dilemma and can only be a winner if he correctly determines the movement of the stock and the magnitude of the move. If the market moves in the opposite direction or if it does not move at all, the option buyer is a loser. The option buyer must not only correctly foretell market direction but his prediction must be accompanied by a major move in the market. A less than significant move will still result in a loss for the option buyer.
On the other hand, the option seller takes maximum advantage of the decaying characteristic of options. As an option seller he merely sits and waits for the option to lose value daily to the point of being worthless on expiration day. He does not need to correctly predict market direction to generate profits. If he sells puts, he is a winner if the stock stays flat, a winner if the stock goes up. He can only lose if the underlying drops far enough to hit past his strike price position. This means that even if the stock goes down he is still a winner if the move is not far enough to hit his strike position. If he is a call seller, he wins when the stock drops, stays flat or moves up less than significantly. Admittedly, during the validity period of the option until its expiration date, the option seller faces the potential threat that the underlying stock may move continuously against him past his strike position, in which case there would be no limit to his loses. But this can only happen if the seller is careless enough not to watch and monitor his position on a regular basis!
Options are not ‘buy and hold’ securities. All options traders, buyers and sellers alike, carefully watch their positions on a regular frequency. In their march towards expiration dates options are always in motion in tandem with their underlying stocks thereby continuously presenting opportunities for making profits or presenting danger signals for incurring losses. Option sellers are a more cautious lot than buyers and consequently sellers have developed various protective trading techniques to offset the so called ‘unlimited risk’ factor to the point where it is nearly a neglible risk. What are these trading techniques? Each option seller may have his own system but here are a few strategies that conquer the risk.
1. First and foremost and probably the most important thing to consider when getting into selling options is the choice of securities. Highly volatile stocks are most susceptible to the highest risks because of their potential for making dramatic price moves up or down. While volatile stocks tend to offer attractive option premiums, this benefit can be cancelled by the higher risk of a major negative move. A price gap out in a stock can cause severe losses. Conservative option sellers who make a living or grow their wealth selling options will often tend to play ETFs (Exchange Traded Funds) or Indexes instead of stocks. These securities seldom undergo dramatic one day moves and it is even less vulnerable to price gap outs.
2. Careful monitoring of position – As mentioned earlier, option sellers tend to be a cautious lot and anyone who sells options and does not watch the progress of his position can only be considered dumb or stupid. One does not need to be glued to his computer screen and watch every move in the stock market. He only needs a cursory look at the market now and then to see how things are developing. When a situation starts building up where one’s short position may be in danger, action can immediately be initiated before it degenerates into a bad situation. The option sold may be bought back immediately at a slight loss before it gravitates to bigger losses. This slight loss can be no more than what an option buyer would be exposed to in a similar negative scenario. And this is assuming the option seller does nothing more than buy back the losing position. But if his monitoring is combined with the other strategies illustrated below then the risk of loss is nearly nil.
3. Use of stop losses – For the trader who does not have the time to occasionally watch the market he may use stop losses on his positions at the same time that he initiates the short positions. There is no need to explain here what a stop loss is as it is presumed anybody who is in the stock and options market knows what this is. Additionally, with the advent of online trading, electronic alerts can be initiated with brokers so that when a perilous situation starts developing an automatic alert signal is sent to the trader’s email, iphone, or cell phone.
4. Use of credit spreads – Here again there is little need to explain what a credit spread is as once more it is assumed that options traders know what this strategy entails. This trading method coupled with careful monitoring and the use of the stop loss is enough to almost guarantee that the option trader will never be exposed to the fear of ‘unlimited loss’.
5. Use of the roll-out feature of options – This is one strategy that is not being used to maximum advantage by many option sellers. Based on their personal trading experiences and extensive use of this feature those who have been using it swear by it as a powerful defensive strategy in preventing losses in option selling.
Strategy number 5 above is effective enough when used alone and by itself, but when combined with the other strategies above, the whole system becomes a formidable program that almost totally eliminates losses in option selling. One particular options seller has personally developed his own system of using a combination of all the above in his option trading activities and he says with much confidence that he sleeps very well at night thinking he will never ever be subjected to the so called risk of ‘unlimited losses’. He has written an e-book about his system and in it he describes in much detail the methodology he uses in overcoming the risk. Anyone interested may visit his web site at: http://www.theoptionseller.com
For those who are contemplating of getting into the option selling business, pay no heed to the naysayers. Next time you hear someone say “naked option selling is extremely risky due to the potential for unlimited losses” that person is most likely an option buyer who has never ventured into the lucrative field of option selling. His remark obviously comes from his ignorance of the inner workings of options and the various safeguards available to the option seller. To the knowledgeable option seller the risk of losing money is less than the risk facing the option buyer.
About the Author
The author is a semi-retired business executive who now dedicates time to trading stock options. His stock and options trading experience spans nearly 30 years. He has been specializing in selling naked options for the past several years and has written a ‘how to’ ebook about his successful trading system.
For more information: http://www.theoptionseller.com
Parts Option
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 Panasonic Lumix DMC ZS5 Option Pad Main PCB Board REPAIR PART VEP56102A  US $45.00
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 GENUINE PANASONIC DMC ZS1 OPTION PAD MAIN PCB GOOD PARTS US $38.00
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 Panasonic Lumix DMC ZS1 Option Pad Main PCB Board REPAIR PART VEP56081 US $38.00
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 Panasonic Lumix DMC TZ5 Option Pad Main PCB Board REPAIR PART US $34.00
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 GENUINE PANASONIC DMC TZ5 OPTION PAD MAIN PCB BOARD PARTS US $32.00
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 POLAROID T831 PARTS CIRCUIT BD FLASH OPTION PAD INST US $30.00
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 Canon SX10 Option Buttons Board Replacement Part US $29.99
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 Panasonic Lumix DMC TZ4 Option Pad Main PCB Board REPAIR PART US $28.00
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 PANASONIC TZ4 DIGITAL CAMERA PARTS OPTION PAD W INST US $25.00
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 KODAK Z812is OPTION PAD DIGITAL CAMERA PARTS WITH REPLACEMENT DIRECTIONS US $25.00
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 GENUINE PANASONIC DMC TZ3 OPTION PAD BOARD PART REPAIR US $24.99
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 OLYMPUS 1030SW PARTS OPTION PAD WITH REPAIR DIRECTIONS US $24.00
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 FUJI F 470 DIGITAL CAMERA PARTS OPTION PAD W DIRECTIONS US $23.00
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 OLYMPUS Fe 3010 DIGITAL CAMERA PARTS OPTION PAD W INST US $23.00
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 FUJI F 460 DIGITAL CAMERA PARTS OPTION PAD W DIRECTIONS US $23.00
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 KODAK V1003 DIGITAL CAMERA PARTS OPTION PAD W FLASH US $21.00
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 CANON SX120 is DIGITAL CAMERA PARTS OPTION PAD US $20.00
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 CASIO Z29 PARTS OPTION PAD WITH REPAIR DIRECTIONS US $20.00
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 Sony DSC HX9V Rear Buttons Option Panel Replacement Part US $20.00
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 Genuine Samsung TL100 LCD Option Panel Replacement Part US $19.99
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 CANON SX120 is DIGITAL CAMERA PARTS OPTION PAD W INST US $19.00
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 FUJI S7000 DIGITAL CAMERA PARTS OPTION PAD W DIRECTIONS US $19.00
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 FUJI S7000 DIGITAL CAMERA PARTS OPTION BUTTONS W INST US $19.00
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 OLYMPUS Stylus 600 OPTION PAD DIGITAL CAMERA PARTS WITH REPLACEMENT DIRECTIONS US $19.00
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 Canon SX210 Option Buttons Board Replacement Part US $17.99
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 CANON A720 DIGITAL CAMERA PARTS OPTION PAD W DIRECTIONS US $17.00
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Futures Options Vs Stocks Options
While we may be talking about how profitable and consistent money can be made by selling options, some traders have popped the most fundamental but yet critical question on what type of options to sell. Our context here refers to stock options, ETFs options or futures options.
Most options sellers may be familiar with the concept of selling options against equities which can include stocks or ETFs, but selling options against futures contract may be a totally new ground to them. The basic principles may remain generally the same, but one must be aware of certain aspects which could make one more appealing or fearful than the other.
ETFs options work very much the same as stocks options. They are treated like just normal stocks except that while stocks can crash to zero value, the possibility of ETFs crashing to zero is extremely small, which I will not commit to saying zero. Something very drastic must have happened to the market to cause this to happen since ETF like SPY comprises of some of the strongest companies listed in the exchange. And for that reason, I generally prefer to sell put options on ETFs. Of course, that’s just my preference and I believe you have yours too.
I have heard of some traders who did options selling on stocks and I mean on big companies which failed. Depending on the risk management approach that was taken, disastrous to the trading account could have been avoided or minimized then.
The risk associated with selling options on stocks may therefore be perceived as relatively higher and thus lead to a possibly higher margin. Premiums obtained from selling stock option and future options differ. Margin requirement from selling stock options can be 10, 20 times higher than the premium collected while that for future options can be just a few times higher. The return on investment is thus viewed as better for doing options selling on future contracts.
Strike price consideration is also a critical factor when deciding between stocks and futures options. For futures options, it is possible to sell very far OTM options and yet collecting a reasonable amount of premium for it. However, for stock options, one would have noticed that after just a few strikes OTM, the premium to a miserable amount which might not be worth the risk to do so.
With a lower margin and possibility of getting a substantial premium for very far OTM options, futures options seemed a much choice than stocks options at this moment. However, one must be aware that futures come with contract dates which they mature or expire. They are unlike stocks or ETFs which one can hold upon assignment on the expiry dates. Risk management for futures and stocks options selling hence differ. Futures contracts like the E-mini S&P (symbol ES) also come with different contract dates, e.g., the September, December contract etc. ES options expiring in the months of October, November and December are associated with the underlying future contract which expires in December. Such knowledge can be important to a trader who is trading these options though the price difference between the various future contracts can be small.
Hope this article has been helpful to you if you are thinking of embarking on the futures options selling track.
Good luck!
About the Author
uktank is the author of the website http://www.anybodycanberich.com which deals with options trading, especially options selling.