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Trader's Edge PREMIUM PROGRAM
Losing your shirt buying options?
You've probably heard it said that most futures options expire worthless. The Chicago Mercantile Exchange estimates over 80% of all options expire worthless. With this in mind, shouldn't you be selling them instead of buying them?
The Traders Edge Premium Program has been designed to capitalize on the very high probability that a certain category of out-of-the-money options will eventually expire worthless. By seeking out and targeting these specific options for our selling program we expect to gain a trading edge. Our trading experience and research has shown that, in the long, the writer of options should a higher return on investment than the buyer.
The Primary Advantages Of Selling Options
Time Decay: As time goes by and we get closer to option expiration, the value of an out-of-the-money option will tend to diminish as long as the volatility remains constant, and the underlying futures market does not make an adverse move. In other words the passing of time, or time value, can work for you instead of against you. If you sell an out-of-the-money option, the entire value of that option (this is the premium the buyer pays to you) is time value (extrinsic value). As time passes, and if the market moves favorably, or does not move at all, the option will gradually lose its value (see accompanying chart). If, upon expiration, the option is out-of-the-money (the underlying futures has not exceeded the strike price of the option), it will expire worthless and you, the seller, will keep the entire premium excluding any commissions and fees. At this time the position automatically closes out. You can also exit your option position before the expiration date.
You don't have to be right about market direction: When you trade futures or buy options you have to be right about the market direction in order to profit on the trade. Since it is very hard to predict market direction, wouldn't it be easier to project where you think prices won't go? For example, if you are bearish on a market, you could sell out-of-the-money call options. In this example the market can stay the same, move down or the market could move up (against you), and as long as it is at or below your strike price expiration, you still profit on the option.
Collect premium instead of paying premium: When you take the selling side of an option the premium you collect, less commissions and fees, is then credited to your account. You are collecting a defined amount of money instead of hopefully trying to collect a questionable undetermined amount of money.
Yikes, there's a risk!: Trading commodity futures and options carries a risk, period. You can limit risk when purchasing options, but if you continue to lose premium on a continous basis, your losses will accumulate. A short option can carry the same risk as a futures contract; therefore there is a margin requirement. If the market moves against your short option position your margin might increase. We will work with you to determine what risk parameters and particular selling strategies are right for you.
Even though we believe selling options is more favorable than buying options, the biggest advantage to you is, selling options gives you a larger margin for error. Selling out-of-the-money options allows you to profit from sideways markets, trending markets, and at times money can even be made when the underlying market moves against the sellers position!
Our recommended criteria for selecting options to sell is as follows:
There are four primary strategies we implement involving the writing (selling) of options.
1. UNCOVERED WRITING
Uncovered, or naked writing, involves selling a call OR put without entering into an underlying futures contract. A naked call writer has a neutral bearish view of a market, while a naked put writer has a neutral to bullish view on a market. In most cases we recommend selling out-of-the-money options. This means selling a call with a strike price that is above the futures price or selling a put with a strike price below the futures price. In either case a dollar amount, or premium, is collected and credited to a client's account. In the case of a short call this premium is retained if, by expiration, the futures has moved lower, stayed the same, or moved higher but not up to the strike price of the call. In the case of a short put the premium is retained if the futures has moved higher, stayed the same, or moved lower, but not down to the strike price of the put.
Example: If July Silver is currently $5.50 an ounce, Sell a July $6.00 call option for $800. On expiration you will keep the $800 if the price has fallen below $5.50, stayed at $5.50, or even if it has increased but has not reached $6.00.
2. The Short Strangle
A short strangle is a strategy in which a trader simultaneously sells both an out-of-the-money put AND out of the money call in the same market for the same contract month. This is the optimum strategy for trading sideways markets. All of the premium which was collected upon the initiation of a strangle will be kept if the underlying futures contract is between the strike prices on expiration.
Example: If July Silver is currently $5.50 an ounce. Sell a July $6.00 call option and a July $5.00 put option. Both options are .50 out-of-the-money. By selling these two options you will collect a total of $1,600 into your account. You will keep the entire premium if July Silver is above $5.00 and below $6.00 on expiration.
3. The RATIO WRITE
The ratio write is a strategy in which multiple options are written against an underlying futures contract. This, in effect, creates simultaneous covered and uncovered options positions. Ratio writing involves either selling two or more calls against a long futures position or selling two or more puts against a short futures position. This strategy takes advantage of the fact that option premiums generally do not move dollar-for-dollar with futures prices. In other words, the delta of each option is less than one. This strategy enables the investor to potentially profit in the futures contract, an at the same time retain the entire premium if the options expire worthless. A long option at times can be substituted for the futures.
4. The COVERED WRITE
This is a strategy, which combines a futures position with a short option. A covered call write consists of a long futures an a short call; a covered put write consists of a short futures an a short put. Both strategies are used only when an investor expects little volatility in the futures price.
Covered call writes are generally used when an investor thinks the futures will exhibit an upward bias. Covered put writes are used when the investor's outlook is neutral to bearish. In a covered write, profits in the futures position will more than cancel the potential adverse move in the option premium, allowing the investor to earn a profit. If, on the other hand, the futures moves adversely there will be a profit in the short option that might or might not completely offset the loss in the futures. For the covered option writer, then, the ideal market is one in which the futures prices approaches without exceeding the options strike price.
Trader's Edge currently clears its traders through Rosenthal Collins Group and Vision Financial Markets, LLC. We are also capable of clearing overseas trades and our clients trade at exchange minimum margins. Please call us at (800-972-3343) regarding this program or any other needs you may have.
TRADING FUTURES AND OPTIONS INVOLVES RISK AND ONLY RISK CAPITAL SHOULD BE USED. COLLECTION OF PREMIUM DOES NOT MEAN RETENTION OF PREMIUM.