An option is a contract, which provides for the right of the option holder to buy (Call) or sell (Put) the underlying asset in the specified period and at a certain price, this price is called "strike".
The obligation of the option seller is, to sell or buy this asset on the option exercise date at a specified price.
Let's remember an important rule of option trading, which was voiced in one of the previous lessons. If time affects our position negatively, means, minimum time should be in position! (time is working against us). In this case, time works in our favor..
Strike We have three options: 1. ITM options have a high likelihood of exercise, low liquidity and, the most important thing, a very small fraction of the time value in the option price. Therefore, it is ineffective to sell these options.. 2.
Expiration period How to choose the expiration period when selling options? There are different points of view on this question.: 1. sell options as far away as possible, motivating this with their greater premium and, respectively, the opportunity to get more potential profit from the transaction 2.
Now let's outline the basic rules for selling options, focusing on the entrance, creation and time spent in these positions. Entering a position Selling options makes sense if, when you do not expect a strong market movement to one side<
Potential increase in collateral for a position In one of the first lessons, we introduced the concept of collateral. We already know, that the GO for a futures position is equal to the difference between the upper and lower price limits. Ie.
Selling uncovered options involves three main risks: 1. Ba Movement Against Our Position (price risk) 2. Increased market volatility 3. Possible increase in the margin for the position
When selling a Put option, our maximum profit is limited by the option premium., and our risk is not limited in the event of a decrease in the price of the underlying asset<
When selling a Call option, our maximum profit is limited by the option premium., and our risk is not limited in the event of an increase in the price of the underlying asset<
Covered and uncovered sale Any option sale can be: 1. Covered - we have sold the option and have a long position in the underlying asset if we sell Call or short position in the underlying asset if we sell Put. The position in the underlying asset covers your risks on the sold option.
The second important rule of option trading: If time affects our position negatively, means, minimum time should be in position! (time is working against us). Decrease or increase can happen, Or maybe not, but time flows in one direction anyway, every day bringing us closer to expiration.