selling options on S&P stock index futures?

Question

this is basically done by "selling option spreads, with the objective that both options expire worthless and all the premium collected from the sale is retained as profit."
Has anybody tried it? There is a company that specializes in it and a manager who is well respected in options industry.

Answer 1

A spread is where you buy one and sell one, so it is probably a Straddle, or what's called a Strangle, if you sell both.

The Strangle got it's name in the Seventies, during a quiet period of several years, when some floor traders got so cocky they began getting greedy and selling both a Put and a Call on IBM. Well, IBM is a big mover, and what eventually happened, like usually happens during quiet exteneded periods, it breeds extreme volatility.

Everything was fine as long as only one side could get hit, but eventually, they all got wiped out at once when the volatility whipsawed and got both sides of the position, "strangling" the traders in the middle.

Of course you understand this is very high risk, with very little reward potential (compared to the risk), the very nature of a short option? You might want to check into the margin requirements first; that will be the easy part. The capital requirement to do this is huge, so the bang for the buck is extremely small.

There is a lot more potential, and not any more risk just selling or buying the futures contract. Plus, it is more or less locked into the index, without all of that wild premium fluctuation. Plus the liquidity is better in the futures. All of these factors together favors the use of Stops and Market Orders, whereas options nearly disallow, or at least require a careful use of the latter, and opportunity to bite you.

Let the pros and the deep pockets play this game. You're playing with fire.

Answer 2

I've sold options before and it is a valid strategy, but jazz is right. If the markets move wildly against you, you could end up in a world of hurt.

In the options arena, you have option buyers and options sellers (or writers). For the option buyer, the potential for rewards is unlimited as you could buy an option for $200 and sell if for a 1000% profit or more. The risks are limited as you can only lose the amount you paid for the option (premium). For the options seller, the amount of reward is limited as the most you can make is the premium paid to you by the buyer. The potential for loss is unlimited as the underlying can move big and go deep into the money and you can lose more than you were paid for the option.

So, based on the description of the two parties above, guess which side makes money consistently? It's the option seller. Here's why:

1) 80% to 90% of all options expire worthless. If you're a seller, you want them to expire worthless. So, if 80% - 90% expire worthless and you're an options seller, you have a 80% to 90% chance of making money. But, if you are an options buyer, you only have a 10% to 20% chance of making money.

2) An options buyer has to determine 3 things about the underlying. The direction of the move, the timing of the move and the magnitude of the move. If they are wrong in just 1 of those 3 criteria they'll lose money. Here's an example. Let's say XYZ corp. stock is trading at $25. It's now 9/7/2006 and let's say you buy a Oct. 2006 35 call option on XYZ. So, what happening is that you believe that XYZ corp stock will rise (direction) by at least $10 (magnitude) before the option expires in Oct. 2006 (timing). If you are wrong in any one of those, you'll lose money. The options seller on the other hand is only concerned with 1 thing - "What is the probability that this options will expire worthless". And remember, since 80% to 90% of all options expire worthless, the odds are in their favor that they'll be the one making money.

There are option sellers that have gone months and years without ever losing money. I heard of one option seller going (at that time) 76 months (over 6 years) without a single losing trade.

But, options selling is vastly riskier. Before you go out writing options, you need to become very educated on them on the methodology of options writing and the risks involved. Just 1 bad trade can literally bankrupt you. Just know what you're getting into.

And the spread strategy that you outlined in your question - that is a standard strategy that a lot of options writers use. It's nothing new, but like I said, you should only use that strategy during a ranging market. If the market is trending, you'd only want to write 1 side.

Answer 3

It sounds like they are teaching techniques for selling an out-of-the-money call with an out-of-the-money put. In this situation, there is a high-probability that both options will expire worthless, but you have to be careful, because if the there is big change in price, you can potentially lose big. Although, it sounds like a legitimate option selling strategy.

Answer 4

Yes I have, and it involves selling a call above where you think it may go to, and simultaneously selling a put below where you think it may go. Basically you are selling the spread above and below a channel, hoping the S&P doesn't break the channel. It is great when there is a channel, but risky should things get volital. If you haven't done it before, papertrade it first and follow along with someone who is respected. Good luck!

Answer 5

perhaps you can try forex. which is also excellent way for you to invest.

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try forex from here:

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Answer 6

I have never tried it but technically it makes sense and could be done. It just depends on how much it costs to do this.