Benefits of Selling Options
One of the key benefits is that time is on your side. Options have a limited lifespan and lose value over time. When you sell options, time decay allows you to make money even if the underlying market remains flat. You can also profit if the futures market moves against you, as the option may not move enough to offset the loss in time value.
Opportunities in Your Favor
It’s no secret that the majority of options expire worthless. This is a simple fact, but it can help increase your trading opportunities in your favor and make commodities trading a profitable experience. You could almost throw darts at a list of out-of-the-money futures options to pick your trades. Most will likely expire worthless, which is a 100% gain before commissions and fees when you sell them.
The Unlimited Risks of Selling Options
Every trading strategy in commodities, futures, and options has its downsides. The strategy of selling options involves nearly unlimited risks. If you sell a naked option – one that is not covered or protected – you take on the risk of magnifying your losses. Option sellers often win a high percentage of their trades, but they have some losers now and then that are greater than all their wins combined. For this reason, it is crucial to manage risk when selling.
Potential Profit vs. Risk
Option buyers have a chance for unlimited profit. Option sellers can make a profit of 100% or the premium received minus commissions and fees. Many commodity traders love the benefits of unlimited profits. Most traders do not have many trades that return more than 100% because they are very quick to take profits. So, if you aren’t seeing returns over 100% on trades, and you have a lower percentage of winners when buying options, why wouldn’t you want to sell options instead of buying them?
Selling Options is a Matter of Putting Time and Opportunities in Your Favor
Selling options is simply a matter of putting time and opportunities in your favor. It is your responsibility to avoid risking a large amount of your account on any single trade. You need to cut your losses if trades move against you. Just assume that two out of every three options you sell will expire worthless. You will keep your risk at 100% of the option premium in losing trades. In the end, you should still be profitable even if two out of three options expire worthless – which is the industry average.
Source: https://www.thebalancemoney.com/selling-options-on-futures-and-commodities-809145
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