If you a trader , then at one or other time you have heard or even considered Option Selling(Or option writing). But every time you have tried to talk about option writing , you were scared off by your broker, friend or other message board poster telling you, the ignorant, about “unlimited risk” in option selling. Instead, you were perhaps recommended to buy options, if at all you want to trade in options at first place, as it carries limited risk of the premium you pay.
However, after trying to trade in future and losing more money than I made profits I am now trying trade in option selling. Ofcourse, it has theoretical unlimited risk. But as in theory, an option buyer has prospect of unlimited profit, but in real he never has unlimited profit. Similiarly option writer does not have to face unlimited risk, specially with suitable risk management method applied in option selling.
As in future trade, when the trade goes against you , its upto you to when to square off your trade considering your risk appetite (Future trade has also unlimited risk, if you dont cotrol it). Similarly in option selling you can decide your risk management method and strictly adhere to it.
In option buying your odd to win is 1:3. Suppose you are bullish on a stock, therefore you bet on it, but the stock may go up as you guessed, go down or remain flat. Moreover, possibly you are good at technical analysis and got clue from the chart and guesses correct direction of the stock, but there are still chances that the stock may go in your desired direction, but at the same time it may not reach at the price where your trade becomes profitable.
In option selling you dont have to worry about guessing precise direction and level of a stock or index. You have to see the broad range of movement of a stock/index on both side. Then you may want to check the volatility of given stock or index, which will give you broad idea of volatility in coming days.
Other thing about the option selling, particularly in the given environment of Indian stock market, where far months contracts (except NIFTY with somewhat liquid contracts) are not liquid enough to trade. Therefore most trades are available is of near month. On account of only-liquid near month contracts, premium is often low and therefore income is generated through option selling would be comparatively low.
One of the most important aspect of option selling is risk management, dont trade in option selling unless you have planned how to tackle loss/risk. Ordinary you can define your risk appetite for each trade. You can decided how much amount of loss you are ready and can bear on each trade if the trade goes wrong.
I choose another kind of risk management, as I do not want lose any of my capital. I prefer to sell call and put far from the spot price and collect premiums from both the side. Obviously market will go , if it does, in one direction in such time I use premium collected from other side as buffer. If premium price equals to the premium collected from both side, I would square off my position.
In beginning of this month I have opened following positions by selling calls and puts as under :
TATASTEEL CALL 640 @ Rs.5.70
TATASTEEL PUT 470 @ Rs.3.00
SUZLON PUT 60 @ Rs. 00.75
SUZLON PUT 65 @ Rs. 00.90
NIFTY CALL 5400 @ Rs.22-50
NIFTY PUT 4700 @ Rs.22-00
NIFTY CALL 5300 @ Rs.36-00
NIFTY PUT 4800 @ Rs.31-00
I have collected around 16,000-00 this month, and as the market is trading in very narrow range, most of , almost all, option would expire worthless, and I will keep the premium.
Please note, this is not advice or recommendation to start option selling. You can find various educational material on the net about option and option selling. Do at your with your own understanding at risk.