Selling Options

[simple_trader]

Hi All,

Recently I have studied a book on options trading and the author recommends
selling options. I found that this is very costly activity. I need to have lot of money in my account to sell an option. For a paltry sum of Rs. 300 odd rupees, I had to lock some Rs. 20000(twenty thousand) for a period of 10 days.

Obviously I sold OTM options far above current levels of NIFTY to be on safe side.

Am I playing it right? Does it require that much of margin? Is there any way to sell options with less margin? Please let me know.

Thanks in advance.
PSVR

Yes it is right that you have lock lot of margin to get small profit as per your trading plan (selling naked out of money options).

There are many other usage of selling option.

1. If you hold something in cash / future and you want to hedge it. Then option can be sold for over night position.

2. If you think market can bounce from some point after steep fall, then out of money option selling will be better than buying in future.

3. If you are worried about your naked option buy position, then appropriate option can be written to protect against time value decay.

As per my thinking, we should have both option buy and sell in our trading strategy. Everything has its own time. We need not restrict to only option selling.

Selling far out of money option is not a bad idea. Specially market is in contracting mode now. May be that's one of the reasons, why everybody's eye is seeing that easy to make money in writing.

But careful, when it will be expanding later! May be buying will be helpful then.

regards