The Complete Option Report

Option Selling
by Ken Trester

The option markets provide that rare opportunity for the individual investor to be the bank, casino or legal bookie. In other words, you have the opportunity to take the bet rather than make the bet. Taking the bet refers to option writing—the direct opposite
of option buying. The option writer is the one who takes and guarantees to pay off on the bet made by the option buyer.

When you go to the sports book in a casino in Nevada, the job title of the person who takes your bet on a football or basketball game is called a sports writer. The person who takes your bets when you play Keno in a casino is called a Keno writer.

Now you have the opportunity to be a writer, an option writer, where instead of buying an option, you sell an option and the option premium (price) goes directly into your account. Now, you have to pay off if the underlying stock or futures moves
across the strike price and into-the-money.

The beauty with an option writer over a casino or bookie is that you have the ability to close the casino door. In other words, you have the ability to close out your position and obligation at any time by buying back the option.

Simple Example

For example, let’s say that the IBM Dec 110 call is priced at 2 when the stock price is 100. You would write this option by entering an order to sell the Dec 110 call at 2 to open. When the order is executed, $200 goes into your account.

However, for the $200 you are obligated to deliver 100 shares of stock at $110 a share to an option buyer if he exercises your option. That would occur if IBM is at or above 110, especially at expiration.

If IBM is below 110, the option will expire worthless; in either case you keep the $200. Of course, you can close the position out at any time before expiration by buying
back the option.

Option writing can be played by all types of option investors from the conservative to the high risk-takers and in all cases can provide an excellent source of income. In fact, to be a professional option trader, you must do some option writing because it
provides a consistent source of income.

The Advantage of Option Selling

The secret advantage of option writing is that you can enter
trades where you have a very high probability of winning no matter
what the market, a stock or a futures does.

In fact, you can sometimes enter a trade that has a 99% chance of winning. In a sense, at times, they are giving money away on the exchanges. Why?

The option writer usually wins if the underlying instrument moves in the direction you expect or stays still or moves against you very slowly. The only time the option writer gets hurt is when the underlying instrument makes a big quick move against you. The disadvantage to the option writer is the chance of a big loss, for you face unlimited risk.