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Sell Option, come utilizzarle?
Per un’analisi delle opzioni di vendita.
Cosa sono le sell option? Come vanno utilizzate? Esse si configurano come opzioni binarie vendibili, dall’inglese “sell” che si traduce con “vendere”.
Occorre comprendere la differenza più evidente con le opzioni binarie normali. Le opzioni binarie si configurano come uno strumento finanziario che paga un profitto fisso alla scadenza. Per ottenere un guadagno è quindi necessario che alla scadenza, e non durante tutto il periodo, l’opzione raggiunga, mantenga o superi un certo prezzo. Questo significa che se ad esempio l’opzione viene acquistata alle ore 11:30 e la sua scadenza è per le ore 14:00, non è importante che l’obiettivo sia raggiunto durante l’intervallo 11:30-14:00, ma solo alle ore 14:00
Quindi, ipotizziamo il cross EUR/USD al prezzo di 1,34543, se per esempio si acquista una opzione call (ipotesi rialzista), il broker paga se il prezzo EUR/USD supera quota 1,34543 alle ore 14:00. Poco importa se alle ore 13:59 il prezzo è sotto quota 1,34543, la cosa importante per essere pagati è che alla scadenza esatta, quindi ore 14:00, il prezzo sia superiore. Negli ultimi tempi però, i broker vanno sempre più incontro alle esigenze dei trader, ecco perché sono nate le sell option. Le opzioni vendibili, a differenza di quelle standard, possono essere vendute prima della scadenza. Ciò consente di adottare strategie differenti.
Si può pensare ad esempio a queste due ipotesi:
1. Prima della scadenza la previsione del trader si rileva errata
- Con le opzioni binarie normali si deve attendere la scadenza e sperare che nel frattempo il prezzo sia cambiato e diventato favorevole.
- Con le opzioni binarie vendibili si può decidere anche di vendere l’opzione prima della scadenza e ricavare una parte del capitale investito
2. Prima della scadenza la previsione si rivela corretta
- Con le opzioni binarie normali si deve attendere la scadenza e sperare che il trend non cambi
- Con le opzioni binarie vendibili è possibile massimizzare immediatamente vendendo l’opzione e riscuotendo il proprio guadagno.
When does one sell a put option, and when does one sell a call option?
The incorporation of options into all types of investment strategies has quickly grown in popularity among individual investors. For beginner traders, one of the main questions that arise is why traders would wish to sell options rather than to buy them. The selling of options confuses many investors because the obligations, risks, and payoffs involved are different from those of the standard long option.
- Selling options can be a consistent way to generate excess income for a trader, but writing naked options can also be extremely risky if the market moves against you.
- Writing naked calls or puts can return the entire premium collected by the seller of the option, but only if the contract expires worthless.
- Covered call writing is another options selling strategy that involves selling options against an existing long position.
In options terminology, “writing” is the same as selling an option, and “naked” refers to strategies in which the underlying security is not owned and options are written against this phantom security position. The naked strategy is aggressive and higher risk but can be used to generate income as part of a diversified portfolio. However, if not used properly, a naked call position can have disastrous consequences since a security can theoretically rise to infinity.
To understand why an investor would choose to sell an option, you must first understand what type of option it is that he or she is selling, and what kind of payoff he or she is expecting to make when the price of the underlying asset moves in the desired direction.
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When Should I Sell A Put Option Vs A Call Option?
An investor would choose to sell a naked put option if her outlook on the underlying security was that it was going to rise, as opposed to a put buyer whose outlook is bearish. The purchaser of a put option pays a premium to the writer (seller) for the right to sell the shares at an agreed upon price in the event that the price heads lower. If the price hikes above the strike price, the buyer would not exercise the put option since it would be more profitable to sell at the higher price on the market. Since the premium would be kept by the seller if the price closed above the agreed-upon strike price, it is easy to see why an investor would choose to use this type of strategy.
Let’s look at a put option on Microsoft (MSFT). The writer or seller of MSFT Jan18 67.50 Put will receive a $7.50 premium fee from a put buyer. If MSFT’s market price is higher than the strike price of $67.50 by January 18, 2020, the put buyer will choose not to exercise his right to sell at $67.50 since he can sell at a higher price on the market. The buyer’s maximum loss is, therefore, the premium paid of $7.50, which is the seller’s payoff. If the market price falls below the strike price, the put seller is obligated to buy MSFT shares from the put buyer at the higher strike price since the put buyer will exercise his right to sell at $67.50.
An investor would choose to sell a naked call option if his outlook on a specific asset was that it was going to fall, as opposed to the bullish outlook of a call buyer. The purchaser of a call option pays a premium to the writer for the right to buy the underlying at an agreed upon price in the event that the price of the asset is above the strike price. In this case, the option seller would get to keep the premium if the price closed below the strike price.
The seller of MSFT Jan18 70.00 Call will receive a premium of $6.20 from the call buyer. In the event that the market price of MSFT drops below $70.00, the buyer will not exercise the call option and the seller’s payoff will be $6.20. If MSFT’s market price rises above $70.00, however, the call seller is obligated to sell MSFT shares to the call buyer at the lower strike price, since it is likely that the call buyer will exercise his option to buy the shares at $70.00.
Writing Covered Calls
A covered call refers to selling call options, but not naked. Instead, the call writer already owns the equivalent amount of the underlying security in his or her portfolio. To execute a covered call, an investor holding a long position in an asset then sells call options on that same asset to generate an income stream. The investor’s long position in the asset is the “cover” because it means the seller can deliver the shares if the buyer of the call option chooses to exercise. If the investor simultaneously buys stock and writes call options against that stock position, it is known as a “buy-write” transaction.
Covered call strategies can be useful for generating profits in flat markets and, in some scenarios, they can provide higher returns with lower risk than their underlying investments
The Bottom Line
Selling options can be an income-generating strategy, but also come with potentially unlimited risk if the underlying moves against your bet significantly. Therefore, selling naked options should only be done with extreme caution.
Another reason why investors may sell options is to incorporate them into other types of option strategies. For example, if an investor wishes to sell out of his or her position in a stock when the price rises above a certain level, he or she can incorporate what is known as a covered call strategy. Many advanced options strategies such as iron condor, bull call spread, bull put spread, and iron butterfly will likely require an investor to sell options.
The Ins and Outs of Selling Options
In the world of buying and selling stock options, choices are made in regards to which strategy is best when considering a trade. If an investor is bullish, she can buy a call or sell a put, whereas if she is bearish, she can buy a put or sell a call. There are many reasons to choose each of the various strategies, but it is often said that “options are made to be sold.” This article will explain why options tend to favor the options seller, how to get a sense of the probability of success in selling an option and what risks accompany selling options.
Intrinsic Value, Extrinsic Value, and Theta
Selling options is a positive theta trade. Positive theta means the time value in stocks will melt in your favor. An option is made up of intrinsic and extrinsic value. The intrinsic value relies on the stock’s movement and acts almost like home equity. If the option is deeper in the money (ITM), it has more intrinsic value. If the option moves out of the money (OTM), the extrinsic value will grow. Extrinsic value is also commonly known as time value.
During an option transaction, the buyer expects the stock to move in one direction and hopes to profit from it. However, this person pays both intrinsic and extrinsic value and must make up the extrinsic value to profit. Because theta is negative, the option buyer can lose money if the stock stays still or, perhaps even more frustratingly, if the stock moves slowly in the correct direction but the move is offset by time decay. Time decay works well in favor of the option seller because not only will it decay a little each business day, it also works weekends and holidays. It’s a slow-moving moneymaker for patient investors.
Volatility Risks and Rewards
Obviously having the stock price stay in the same area or having it move in your favor will be an important part of your success as an option seller, but paying attention to implied volatility changes is also vital to your success. Implied volatility, also known as vega, moves up and down depending on the supply and demand for option contracts. An influx of option buying will inflate the contract premium to entice option sellers to take the opposite side of each trade. Vega is part of the extrinsic value and can inflate or deflate the premium quickly.
Figure 1: Implied volatility graph
An option seller may be short on a contract and then experience a rise in demand for contracts, which, in turn, inflates the price of the premium and may cause a loss, even if the stock hasn’t moved. Figure 1 is an example of an implied volatility graph and shows how vega can inflate and deflate at various times. In most cases, on a single stock, the inflation will occur in anticipation of an earnings announcement. Monitoring implied volatility provides an option seller with an edge by selling when it’s high because it will likely revert to the mean.
At the same time, time decay will work in favor of the seller too. It’s important to remember the closer the strike price is to the stock price, the more sensitive the option will be to changes in implied volatility. Therefore, the further out of the money or the deeper in the money a contract is, the less sensitive it will be to implied volatility changes.
Probability of Success
Option buyers use a contract’s delta to determine how much the option contract will increase in value if the underlying stock moves in favor of the contract. However, option sellers use delta to determine the probability of success. A delta of 1.0 means an option will likely move dollar-per-dollar with the underlying stock, whereas a delta of .50 means the option will move 50 cents on the dollar with the underlying stock. An option seller would say a delta of 1.0 means you have a 100% probability the option will be at least 1 cent in the money by expiration and a .50 delta has a 50% chance the option will be 1 cent in the money by expiration. The further out of the money an option is, the higher the probability of success is when selling the option without the threat of being assigned if the contract is exercised.
Figure 2: Probability of expiring and delta comparison
At some point, option sellers have to determine how important a probability of success is compared to how much premium they are going to get from selling the option. Figure 2 shows the bid and ask prices for some option contracts. Notice the lower the delta accompanying the strike prices, the lower the premium payouts. This means an edge of some kind needs to be determined. For instance, the example in Figure 2 also includes a different probability of expiring calculator. Various calculators are used other than delta, but this particular calculator is based on implied volatility and may give investors a much-needed edge. However, using fundamental evaluation or technical analysis can also help option sellers.
Many investors refuse to sell options because they fear worst-case scenarios. The likelihood of these types of events taking place may be very small, but it is still important to know they exist. First off, selling a call option has the theoretical risk of the stock climbing to the moon. While this may be unlikely, there isn’t upside protection to stop the loss if the stock rallies higher. Therefore, call sellers will need to determine a point at which they will choose to buy back an option contract if the stock rallies or they may implement any number of multi-leg option spread strategies designed to hedge against loss.
Selling puts, however, is basically the equivalent of a covered call. When selling a put, remember the risk comes with the stock falling, but a stock can only hit zero and you get to keep the premium as a consolation prize. It is the same in owning a covered call—the stock could drop to zero and you lose all the money in the stock with only the call premium remaining. Similar to the selling of calls, selling puts can be protected by determining a price in which you may choose to buy back the put if the stock falls or hedge the position with a multi-leg option spread.
The Bottom Line
Selling options may not have the same kind of excitement as buying options, nor will it likely be a “home run” strategy. In fact, it’s more akin to hitting single after single. Just remember, enough singles will still get you around the bases and the score counts the same.
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