Upper Brookville, NY (PRWEB) July 03, 2012
Dr. Singh writes, if there is one way that the most people lose money, it lies in buying options, whether they are call or put options. This is confirmed by a study performed by the CME.
Three key patterns emerge from the study of CME data;
1. On average, three out of every four options held to expiration end up worthless.
2. The share of puts and calls that expired worthless is influenced by the primary trend of the underlying market.
3. Option sellers still come out ahead even when the seller is going against the trend.
Here are some of the main reasons in favor of options selling vs. buying:
1. Going against the trend
The odds are in one’s favor for Out-Of-The-Money options expiring worthless, while it is absolutely opposite for the option buyers.
2. Not controlled by greed
When one buys options, one may be controlled by the greed as it may be difficult to determine when the trend may reverse itself. One may end up selling the option either too early or too late. This may not be the case when one sells put options as in the worst case scenario one may end up owning the stock at a lower price than one may have intended to buy it at in the first place.
3. No Stop Losses
When one buys options, one may put stop losses below or above a certain price. One may have done it based on a technical or fundamental analysis. How many times did it happen that the market will go down or go up to one’s stop loss point, take one out of the market and then reversed the direction?
One may not have to place a stop loss order when one sell puts as in the worst case one will end up owning the stock at a price that one intended to buy at.
4. Time in one’s favor
This is one of biggest advantage of selling options instead of buying it. Every option has two values. One is intrinsic value and the other being the time value. Even if the stock does not move against the trend, time value of the options will keep on eroding every day. The option having less value on a daily basis hurts the buyer of the option, while the opposite is true when one sells options. The seller is a gainer every day, even if the stock does not move at all.
5. Earn interest on other’s money
When one sell options, it adds up money in one’s account. Even though one may not be able to withdraw it, one earns interest on the money every day until the day of expiration. The opposite is true when one buys options. In this regard, one has to be very careful in selecting the right brokerage company. Many brokerage companies do not pay interest on the money which is accumulated by selling options.
Down side of selling Options
1. Unlimited Risk
When one buys options, one’s maximum loss is limited to the amount of the money that one paid to buy those options. The opposite can be true for the seller of the options. The seller is exposed to potentially having to buy back the option at a much higher price. However, there are ways to control this unlimited part of the risk by using several strategies.
2. Limited Profit
With respect to potential profit, the seller of an option definitely has a disadvantage. The seller cannot possibly make more than the amount that one sold the option for.
About the author:
Dr. Harsimran Singh earned a Ph.D. in Business Economics with specialization in Wall Street trading. He migrated to the United States with a total of $8 and traded over $100 million in his personal account. His book Stock Options-Work ½ Hour a Day is a gist of his 35 years of trading experience.