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OPTIONS
Prepared by Ira Epstein & Company
Delta Neutral And You
As a new trader, you may be wondering how to get started trading futures and options. If you've researched the subject at all you've probably learned that buying options can help manage the risk of trading. However, the fact remains that most options do expire worthless and options are a rapidly wasting asset–picture an ice cube in the sun–that's what option value is like.
You may have also read that selling options is a hazardous pursuit, fit only for the reckless or professional traders. Limited reward! Unlimited risk! Sounds scary–avoid it.
Unfortunately, these common misperceptions tend to steer the new trader towards buying options and hoping for the best. That's a tough way to go because even a slow, steady trend in your direction will usually leave you with little or no profit due to time decay. With most markets, much of the time in a trade is spent moving sideways or against a given position, So what real chance does an option buyer have?
Not much.
Time to look at selling some options and putting time decay to work for you.
Consider: Sell a call, sell a put, collect the premium instead of paying it. Sit back and wait for the options to expire worthless, as most do. However, like most things in life, it isn't quite that simple.
If you sell an out of the money call, that's a bearish position–as the market moves lower, the call's value decreases. That's good because you sold it. The reverse is true on the bottom side–sell a put and you've established a bullish position. Sell them both at once and you've established a position that makes money as the market moves sideways and time decays eventually and hopefully renders both options worthless. You collect the premium as profit.
What can go wrong? The primary problem in such a position can come from a big increase in volatility, which could greatly increase the premium price on one or both sides.
What usually isn't a problem in such a position? Exercise by the option owner. The futures price expiring in the money. A slow, steady trend in one direction or the other. The limited reward aspect of short options–hint: potential reward can sometimes be enhanced by employing certain strategies.
Now, I'm not recommending you go out and start selling every option on the board. Selling options can be tricky and confusing.
My advice is to use the services of an experienced options broker. Learn the strategies. Discuss the methods.
September 23, 1997 Tim Zurick
Ira Epstein & Company
223 West Jackson, 7th Floor, Chicago, Illinois
Consensus National Futures and
Financial On Line Index
Added to the WWW 09-26-97
Last updated on 09-27-97
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