Selling option: Basic doubt

#1
Guys plz help me on this basic doubt. I am not exactly a novice in options but so far had been only 'buying' options. Now after some consideration and planning want to enter the 'selling' side.

My query is this: Can you square off an option you sold shortly after you sold it? This can happen due to the fact that the underlying's movement is against you and the option may be exercised against you.

We do this always in buying options wherein we square off our position if we want to contain our loss or book a profit.
 
#3
Thanks for the prompt response capricorn. That's some relief. Which means that if the movement is against me I can simply 'buy out' the option at a higher premium, book a loss and close the position?

Now is the second query: I proposed to write naked far-OTM options. This is to take advantage of the fact that most OTM options expire without being exercised. But if the share moves uncomfortably close to the strike price then I will square off. How is this strategy?

Also for writing options does icicidirect ask for a margin?
 

Capricorn

Well-Known Member
#4
Thanks for the prompt response capricorn. That's some relief. Which means that if the movement is against me I can simply 'buy out' the option at a higher premium, book a loss and close the position?

Now is the second query: I proposed to write naked far-OTM options. This is to take advantage of the fact that most OTM options expire without being exercised. But if the share moves uncomfortably close to the strike price then I will square off. How is this strategy?

Also for writing options does icicidirect ask for a margin?
Bad strategy, backtest it you'll find out why.

Yes , all brokers ask for a margin to write options.
 

AW10

Well-Known Member
#5
Thanks for the prompt response capricorn. That's some relief. Which means that if the movement is against me I can simply 'buy out' the option at a higher premium, book a loss and close the position?

Now is the second query: I proposed to write naked far-OTM options. This is to take advantage of the fact that most OTM options expire without being exercised. But if the share moves uncomfortably close to the strike price then I will square off. How is this strategy?

Also for writing options does icicidirect ask for a margin?
Do you know,
- that OTM option can become ATM or ITM as well.
- And what will happen to the price of otm option when underlying moves (in your favour or against you ).

If you don't know how to manage risk in options, then writing naked OTM options might give u high % wins.. but when it goes against you, it will really hit hard. Those few loosing trades will easiliy take away few months of profit.

- What is your plan of risk management specially if you are planning to carryover short positions overnight ? and for that, u need to carry position overnight. If you are just planning to trade intraday, then why not go for buy put/call. Theoratically, they are same as selling Call/ Put.

All the best and happy trading.
 

DanPickUp

Well-Known Member
#6
Do you know,
- that OTM option can become ATM or ITM as well.
- And what will happen to the price of otm option when underlying moves (in your favour or against you ).

If you don't know how to manage risk in options, then writing naked OTM options might give u high % wins.. but when it goes against you, it will really hit hard. Those few loosing trades will easiliy take away few months of profit.

- What is your plan of risk management specially if you are planning to carryover short positions overnight ? and for that, u need to carry position overnight. If you are just planning to trade intraday, then why not go for buy put/call. Theoratically, they are same as selling Call/ Put.

All the best and happy trading.
Hi AW10

In some markets in the world, puts are always over priced because of the permanent fear of a big market drop. One of the markets in the world, which behave like that is the S&P 500.

I never would buy there a put and a call and then hope, that when market moves in one or the other way I could go out on one or the other side with the same profit or loss I made on the other side.

But this are my thought and other ones have other thoughts and experience.

As I know, that you are a pro on the Nifty and you trade that one very well, I just put in my two cent from outside. Maybe there are some more queries about that.

Take care

DanPickUp
 
#7
Do you know,
- that OTM option can become ATM or ITM as well.
- And what will happen to the price of otm option when underlying moves (in your favour or against you ).

If you don't know how to manage risk in options, then writing naked OTM options might give u high % wins.. but when it goes against you, it will really hit hard. Those few loosing trades will easiliy take away few months of profit.

- What is your plan of risk management specially if you are planning to carryover short positions overnight ? and for that, u need to carry position overnight. If you are just planning to trade intraday, then why not go for buy put/call. Theoretically, they are same as selling Call/ Put.

All the best and happy trading.
Dear AW10,

I cannot do day trading since I have a job. Your point regarding naked options hitting hard is well taken and risk management is really the issue. In that sense one can never get into writing options unless it is a covered call/put.

I made a chart of all options bought and sold on icicidirect; I found that the lot sizes are so high that the smallest of the covered call will cost me 2 lac+ as initial investment which I am not prepared to put in now as risk money. So I guess the best bet now is to stick to buying.
 

AW10

Well-Known Member
#8
Dear AW10,

I cannot do day trading since I have a job. Your point regarding naked options hitting hard is well taken and risk management is really the issue. In that sense one can never get into writing options unless it is a covered call/put.

I made a chart of all options bought and sold on icicidirect; I found that the lot sizes are so high that the smallest of the covered call will cost me 2 lac+ as initial investment which I am not prepared to put in now as risk money. So I guess the best bet now is to stick to buying.
Rajadawn, plz read first more on this. What u are saying and concluding is miles away from truth.
To write one nifty contract, you may not need more then 30 or 35k of margin in ICICI direct (by the way, I won't recommend ICICIdirect for option trading due to high brokerage).

You can also cover your risk by going long in other option strike. When u sell one strike and buy another strike to manage risk, you end up creating an Option Spread position.
Plz chk out my thread on "Low risk option strategy ..." for more on it. Feel free to raise question there.

Till the time, u don't get knowledge and experience in option writing, I wouldn't suggest naked option writing to new comers.

Happy Trading
 
#9
Rajadawn, plz read first more on this. What u are saying and concluding is miles away from truth.
To write one nifty contract, you may not need more then 30 or 35k of margin in ICICI direct (by the way, I won't recommend ICICIdirect for option trading due to high brokerage).

You can also cover your risk by going long in other option strike. When u sell one strike and buy another strike to manage risk, you end up creating an Option Spread position.
Plz chk out my thread on "Low risk option strategy ..." for more on it. Feel free to raise question there.

Till the time, u don't get knowledge and experience in option writing, I wouldn't suggest naked option writing to new comers.

Happy Trading


If I was so sure of writing options I would not have posted on this forum at all. The sole purpose of this thread is to clear my doubts ( which I believe many others visiting this site would be having) and keep learning before I am ready for it.

I can understand that using margin is a way to enter into a sell position with only a fraction of required investment. Also beginning to understand the concepts of spread .... Correct me if I am wrong what I meant in my earlier post was that ideally the only risk-less option writing seems to be covered writing wherein you own 100% of the underlying.

In case of writing on margin would I still not be in the risk of unlimited losses or will it be only limited to the margin in case the option is exercised against me?
 

DanPickUp

Well-Known Member
#10
Hi rajadawm

As I read your questions and answers, I see that you do not use any software to trade such strategies.

You tell in your first post : ""I am not exactly a novice in options but so far had been only 'buying' options. Now after some consideration and planning want to enter the 'selling' side""

Even only buying options and being a serious and educated trader would enforce using option analyzing software for your strategies. All the rest ends in the posts you make.

Using option analyzing software and testing most of your questions, would give you the answers you search for.

You should really now go and learn about such software and then come back for other queries. Most of us still will be here.

Take care
 

Similar threads