Selling Deep out of Money Options!!

[umeshmandal]

Image of the Indicator I am referring to :

 

[DanPickUp]

I am no TA, its a Chandelier Stop Tweeked, I will post an image soon.

Details after I post my details, however do answer :
If we have sold a 4800 PUT on the 11th of a month expiring on 28th, with still 14 sessions to expiry while the underlying is around 5050, how do we hedge this position?

If you sold a naked put 4800 and market is at 5050 and stays around there, you just do nothing except having enough money in your account for the margin.

Now: Where do you want to hedge your position and why?

If expiry comes, your sold put has lost all his value and the sold premium is in your account.

Other wise go for a any kind of spread trading to hedge your position if you want to reduce your risk. As simple as that.

 

[DanPickUp]

If market moves down, you sell a credit spread. The short call is near the market and the long call is more far away from the market. This is higher risk.

If you buy a call near market and sell a call more out of the market, this is lower risk.

Vice versa for a put credit spread.

 

[rammmeo]

I would like to ask u to read the JVBLOGGER thread "Picking up nickels in front of steamroller!!" there u will get to know everything abt selling options . wht happens when market stays where it is and wht happens when it runs away

 

[umeshmandal]

If you sold a naked put 4800 and market is at 5050 and stays around there, you just do nothing except having enough money in your account for the margin.

Now: Where do you want to hedge your position and why?

If expiry comes, your sold put has lost all his value and the sold premium is in your account.

Other wise go for a any kind of spread trading to hedge your position if you want to reduce your risk. As simple as that.

Sir, Today I know there is nothing to worry...its not about what to do in this instance, but what to do in such ind=stance, my query is what to do on the day we enter! Though analysis says mkt will move in our direction but it may not!
OKay, spread!! Will read up on it!!!

 

[umeshmandal]

If market moves down, you sell a credit spread. The short call is near the market and the long call is more far away from the market. This is higher risk.

If you buy a call near market and sell a call more out of the market, this is lower risk.

Vice versa for a put credit spread.

This is really helpful!!

 

[umeshmandal]

I would like to ask u to read the JVBLOGGER thread "Picking up nickels in front of steamroller!!" there u will get to know everything abt selling options . wht happens when market stays where it is and wht happens when it runs away

Thanks!!!

(Moderators : This has become a regular feature, Thanks button takes us to some page telling us me I dont have this privilege of Thanking!! )

 

[rammmeo]

Hope the thread would have proved useful in some sense
i hv been selling options in may 2011 but than give up
since gains r very limited and losses very huge
u hv to very disciplined with ur SL's
otherwise the months profit will be washed away in matters of days

 

[DanPickUp]

Selling naked options (ie. without protective buy options which creates a credit spread) is highly dangerous. Way out of the money options can be sold only for little credit and the only way you make money is through Theta (daily decay for the option). If the option you sold was for Rs. 10 and you have 30 days to expiration, the option will decay minimally on a daily basis. The decay only accelerates/decelerates close to expiration. You will go through an emotional roller coaster for the first couple of weeks if the market oscillates. Of course, any black swan event against you can put you in deep trouble. While your max profit is predetermined (Rs. 10 in this e in a large gap up/down situation, it can wipe out your stops and your option losses could very easily go into multiples of the initial credit.

I would recommend against a naked sale of way out of the money options. The rewards are just not worth the risk you undertake.

Cheers and best of luck.

OptionWin

Wow.

You really must be a pro. Great.

Now what about the margins when selling options?

 

[DanPickUp]

Since Selling options can potentially result in unlimited losses, margin requirements are very different for each broker. Your account size and trading frequency also determines the margin that the broker is willing to provide. Furthermore, day trade margin requirements are much lower than carry-overs.

Cheers and best of luck.

OptionWin

Hmm. Ok. Where I trade, hedged positions are taken in to account and positions only on an intra day basis are also taken in to account. So I am clear about that in the USA.

But until now option traders from India told me that sold options have the same margin as a future and that is 25'000 Rp.

So what should I think now after your post?

DanPickUp

Edit: Optionwin has in the main time in detail explained what was told to him from the Indian broker. Post is here:

http://www.traderji.com/options/305...g-strategy-option-spreads-183.html#post695780