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Lesson 7: Selling Options

Options, Selling Options, Stock Options

Options, Selling OptionsWe have seen so far that buying options can be very beneficial because it allows us to buy or sell an underlying at a price advantage over the market. With a very low risk, limited to the premium we paid to the market to buy that option.

We also saw that buying options have bad sides, the time it is against us and the odds very low. But there is another important element to be taken into account: the quality of life.

An important and underestimated thing in trading, as in life, is that it does not matter how much we earn but how we do it. Much better to earn a little less, but doing quiet dreams rather than gaining more but with high stress.

Buying options mean we have to stand in front of a monitor to follow the position, with much less time to dedicate to the family, to our interests and so on. What does not happen in the sale of options and aspect this, as far as we are concerned, is of primary importance.

When selling options, everything we have seen on buying turns around. When we sell options, we will no longer pay a premium to the market, but we will cash it. We will no longer predict where a market could go and in what time, but where we think it will not always go in a certain amount of time.

By doing this, however, we have an element immediately against the market will require us a greater margin against a risk that, without due precautions, can be potentially unlimited.

When we sell options, therefore, we no longer have a right, but we now have an obligation that is to deliver the underlying if, at the expiration date, these go beyond the break-even point.

As regards to the break-even point, the calculation remains the same for buying an option. When we sell a CALL option, the break-even point is obtained by adding the premium cashed minus the commissions to the strike. When I sell a PUT option, instead, the break-even point is obtained by subtracting the premium cashed minus the commissions from the strike.

Now let's see the two types of options, this time not on the part of the buyer but the seller's side.

  1. CALL. The sale of a CALL option gives us the obligation, but not the right, to sell the underlying at a fixed price (strike), entering a certain date (expiration), by cashing a sum of money (premium).
  2. PUT. The sale of a PUT option gives us the obligation, but not the right, to buy the underlying at a fixed price (strike), entering a certain date (expiration), by cashing a sum of money (premium).

The elements that make up the premium are the same as we saw in the previous articles with the purchase of options, i.e. strike, expiration and volatility but change our point of view. While with the purchase we have to try to rip a premium as low as possible by having to pay, with the sale we have to try to get from the market a premium that is as high as possible, because, this time, we are going to get it.

We will see better these elements when we sell options in the next article.

 

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