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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 to 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 December Silver is currently $12.00 an ounce. Selling a December $14.00 call option for $800. On expiration you will keep the $800 if the price has fallen below $12.00 stayed at $12.00 or even if it has increased but has not reached $14.00.
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 December Silver is currently $12.00 an ounce. Sell a July $14.00 call option and a July $10.00 put option. Both options are $2.00 out-of-the-money. By selling these two options you will collect a total of $1,600, minus commission and fees, in your account. You will keep the entire premium if July is above $10.00 and below $14.00 on expiration.