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Selling Options

asiamj

PARKED
Dec 10, 2007
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Anyone knows of a good resource on the web on selling options? I heard this was a good strategy to produce income. Although, it has a downside to it too. Thanks for any comments.
 

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Edge

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FASTLANE INSIDER
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Sep 20, 2007
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Anyone knows of a good resource on the web on selling options? I heard this was a good strategy to produce income. Although, it has a downside to it too. Thanks for any comments.
It is a good strategy for producing income, buying options is also a good strategy for producing income. There is no edge in selling an option as opposed to buying an option, put one hand on your wallet and run from anyone that tells you differently. The edge in selling an option vs. buying has to play into your bias on where the market is going.

Go to the website listed above and google for any other sites that explains the greeks. Take the time to understand the greeks and the max loss of any option position you take.

When someone sells an option for income, they are banking on "theta" gains outweighing any possible "delta" losses. When "theta" doesn't keep up with the "delta" losses, the "gamma" of the position manufacutures more "deltas" against you at an accelerating rate. Think of "gamma" as the trade-off to your "theta" benefit.

I firmly believe that in order to make consistent money using options you need to have a bias on either price direction or volatility direction and be right. If you find yourself being wrong but still making money, as a lot of people do, you are probably selling cheap "gamma" and that is playing with fire. The one time that you are finally wrong enough to lose money, the gamma will probably nail you hard enough to wipe out a years worth of previous months gains.
 

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