Frequently Asked Questions
Maskien das die masjien se leer Research shows that about 80% of all options bought expire worthless at expiry. It is therefore evident that selling options will enable the option seller to be correct 80% of the time.
Large margin for error
The advantage of selling far out of the money options is that the underlying price can move “against” the seller to a large degree without being wrong at the end. That is why the price range in which a profit can be realised is much wider than would be the case if one was to be an option buyer or hold a long futures contract. Pin point entries and perfect timing is not essential to make a success of this strategy.
Time is certainly on the option seller’s side. The more time goes by the more value the option loses. Time decay towards the last part of the option’s life cycle is at its highest.
Effective Risk management
Selling naked options far out of the money is a proven and profitable investment strategy. There are however numerous ways to improve the “margin for error factor” when it comes to selling options. Strategies like spreads and strangles are effective ways of managing risk when selling options. Although the risk of option selling cannot be nullified we will always put transactions on that offer the most effective margin for error factor.
Option selling portfolio returns should be stable and regular and such a portfolio could fulfil a stabilising effect in a total portfolio. A short commodity option portfolio has the potential to offer diversification value in a total portfolio and should be able to complement traditional as well as other alternative investment strategies.
- Unrelated to traditional equity markets and an effective diversifier within a total portfolio
- Contrarian investment approach
- Ability to generate returns in most market conditions
- Unemotional decision making
- Strict risk management process
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