It is a relatively low-risk strategy, since the maximum loss is limited to the premium paid to purchase the call, while the maximum reward is potentially unlimited. Although, as stated above, the odds that the trade will be very profitable are usually quite low. The answer is yes, writing options can be a profitable trading strategy, but it depends on how you structure trades. If you write an option without properly structuring it, you will reduce the chances that the options you wrote (or sold) will make money.
So, it really depends on the skills of the options trader. Strangulations will almost always be less expensive than straddles because purchased options are out-of-the-money options. But the fact that only 10% of all options were exercised does not mean that the remaining 90% of the options expired worthless.
Trading optionscan be an excellent strategy for diversifying your portfolio, limiting risk, and generating profits when executed well.
Conversely, a higher strike price has more intrinsic value for put options because the contract allows you to sell the stock at a higher price than it is currently quoted. A calendar spread involves buying (selling) options with an expiry and simultaneously selling (buying) options on the same underlying with a different maturity. A trader who writes options is someone who sells an option contract in exchange for collecting the premium. So, there is no fixed answer as to how much money you need to write options, as it depends largely on the options you are writing, the stock price, and the position size.
THE ONLY WAY TO LOSE MORE MONEY ON YOUR OPTION THAN YOU ORIGINALLY INVESTED IS IF YOU SHORTED (WROTE) AN OPTION AND THE MARKET TURNED AGAINST YOU. If you plan to buy an option during earnings season, an alternative is to buy one option and sell another, which creates a spread. An option has a fixed life, with a specific maturity date, after which its value is liquidated among investors and the option ceases to exist. The maximum profit for long calls is theoretically unlimited regardless of the option premium paid, but the maximum loss and break-even point will change relative to the price you pay for the option.
Prior to joining Ally, Brian was a senior personnel instructor for the Chicago Board Options Exchange (CBOE) and led the training department of one of the world's largest market makers, Knight Trading Group. Trading during the earnings season usually means that you'll find greater volatility with the underlying stocks and will typically pay an inflated price for the option. So, if you are ever worried that your option will turn into a loss, just close it soon to make a profit and move on to the next trade. Buying OTM call options seems like a good starting point for new option traders because they are low-cost.
As a result, options trading can be a relatively inexpensive way to speculate on a whole range of asset classes.