Why Sell Fx Options

Why sell Call or Put or both Options:

The risk is not defined in advance and the trade needs continual monitoring and adjustments. You can not afford not to monitor the positions. It involves managing margins, making continual adjustments and does involve some amount of stress as risk is not defined in advance. Again, the returns are lucrative. Up to 125% a year, based on my personal trading records.

Most of the time, options buyers are willing to pay more than the value of the underlying instrument for the sellers to assume risk depending on the sentiment in the market. Implied volatility (or market sentiment) generally overstates realized volatility. This results in the profit opportunities for the seller.

Time plays an important factor. As the option gets closer to the spot price of the underlying (deep-in-the-money), the time value disappears.

By selling options, you can let time-decay work in your favour and earn healthy returns. If you think the currency pair price is going to stay relatively flat in the near future, you can earn a positive return by selling a call or put option. If the underlying price and implied volatility stay the same, that trade can turn profitable.

Writing uncovered options has the traditional connotation of “picking up nickels in front of a steamroller”. So why would anyone in their right mind want to do it?

The unique properties of options means being on the sell side can add a new dimension to a trading strategy. Option selling can also be used as a strategy in its own right.

In this tutorial post I’ll explore a few reasons why someone might consider selling options. To summarize the main reasons are:

• Income generation
• Exploiting changes in volatility
• Market neutrality

Let’s look at each one of these briefly.

Income generation: When you sell an option you collect the premium. That is realmoney in your account. Time decay is a certainty and that makes for a virtual daily income stream paid to the option seller.

Selling volatility: An option is more valuable when volatility in the underlying is high. Therefore traders prefer to sell options when volatility is high. By doing this they hope to profit from the collapse back to mean levels.

Market neutrality: Option selling provides a degree of market neutrality. As long as the strike level isn’t reached, a short option position generates the same cash flow, regardless of what the market does in between.