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General trading topics Options basics

Checklist for option writers

Trading as an option writers or sellers isn’t easy because you need to consider a lot of factors in deciding what option to sell.. Volatility and moneyness of an option strike are two important factors to consider among others.

While there are a lot of advantages being an option writer, there are cases where an option seller get to lose everything he gained in 1 single day because there is no cap on the premium appreciation of an option If you are around you could have seen cases where options are up by few ‘000 % in a day.

So you have to secure yourself from these rare cases to be able to have consistent profits and some of the rules below can be considered in your trading as an option seller or writer.

  • Prefer spread trading to naked selling, Being a spread trader can give you that peace of mind which is usually absent in the trading world. The reason is that your loss is limited to a certain amount of money irrespective of where the market moves. Though your profit is also limited you are in complete control of your risk and this is suitable if you are a trader who is more serious and concerned about risk when it comes to option selling.
  • Place stop loss for naked sell trades Being in a naked option sell trade without a stop loss is the worse thing that one can do in options selling world because you are exposing yourself to unlimited risk by this kind of position.
  • Prefer OTM strikes for option selling It is better to select an OTM strike when selling an option because it puts you in an advantageous position where the rate of premium appreciation will be lesser until that strike becomes ATM/ITM. Directly selling an ITM strike is risky for an option seller as the rate of premium appreciation is much higher in ITM options.
  • Have an exit plan You need to have an exit plan even for an options sell side trade either in terms of profit/loss or the timing till which you want to keep it open.
  • Book timely profits, Do not wait more Booking profits is also important in options sell side trading. When you are in profit why not book it or rather there are way to lock your profits also being an option seller explore them online and implement them in your trading. It so happens that people wait for an option to become zero rather than booking it at Rs.1-2 which they have sold it at higher price say > 15. you need to book whatever is on the table instead of waiting for more because in options trading it’s all a matter of few minutes for Rs.1 option to become Rs.100 and Rs.100 becoming Rs.1 option.
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