In this article we consider the SALE of options (SELL operation). Of course, we both buy and sell options in order to make a profit on the money we invest.
When we buy options, and we covered the entire transaction process here, we pay the option premium (the cost of the option) to the broker and receive three benefits:
- We do not need to place any stop losses, as we do when trading spot, which can be knocked out by random market fluctuations.
- Even if we made a mistake with the forecast of the movement of a financial instrument (currency pair), we will never lose more than we paid for the option.
- If we see that the market movement is not in our favor, we can always, at any time, exercise the option (yes, with some loss) and return a greater or lesser part of the money spent on the option.
Disadvantages of BUYING options.
- Buying options isn’t cheap. In the EURUSD currency pair, when buying a CALL or PUT option in the amount of 100k for a couple of weeks, the cost starts from $700.00 (0.0070 point). The further the expiration date of the option, the more expensive it is. And, of course, you might think: “hmm, why do I need an option, if now at the EURUSD rate of 1.1050 I will buy at spot 100k, close the position at the rate of 1.1120 and earn the same $700, rather than spend it on an unnecessary option. Moreover, I only have $500 in my trading account and my broker provides me with a leverage of 1:200. And if I borrow another 200 dollars somewhere to buy, then why do I need it? Buying an option for $700, equivalent to 0.0070 points at a rate of 1.1050, I will only be “at home” at the same rate of EURUSD 1.1120, that is, I will get back the money spent on the option. This is some kind of nonsense.”
And immediately a remark.
We have already said more than once that we recommend that all our clients trade according to our recommendations, with a minimum amount of $2,500.00 in their trading account. Now do you understand why?
Trailer #2.
When opening a position on a spot, even the most verified, most calculated one, we must set a stop loss of 50-70 points. This is a must. We cannot rely on the fact that the market moves “back and forth” and even if it goes against our expectations by two hundred points in the opposite direction, it will definitely return to our level. Such reasoning is madness. Yes, sooner or later the rate will return, however, no one knows when this event will happen – in a few days or in a few years. Even we, with over 25 years of trading experience. We can only guess, but as we know, the Almighty “disposes”. Imagine what kind of financial resources you will have when trading on margin, and what kind of nervous tension this expectation of returning to the required level will require from you?
And the set stop loss of 50-70 points (in our example 1.1000-1.0980) can be knocked out by chaotic market movements in 10 minutes, after which the rate will return to the level of opening our position, and besides, what’s most offensive for many traders – it will go further, to the very cherished 1.1120. But that’s all. The game is over. The account was depleted by 500-700 dollars.
With an option, no market volatility is scary. No stop-losses. And if we see that our expectations (in our example for the strengthening of the Euro) are not met for some time, then we sell the option, take the money (yes, with some loss) and wait for the next opportunity and prerequisites for trading options or spots.
The disadvantage of BUYING options is really that in order to reach a break-even level, the rate must recapture all these points of the option cost (in our case – 0.0070 points or $700.0) before the option begins to give us profitability)
But if we SELL an option, then we do not pay the broker, but on the contrary, the broker pays us. But not everything is so simple and pleasant))).
WHY do we sell options? In what cases?
There are several reasons that are determined by the market situation, and we use the sale of options as an independent tool for making a profit and for hedging positions, but if we describe it simply, so that you immediately understand, then above, in this article we are talking about BUYING an option CALL (expectations for the currency pair to move upward).
We BUY the CALL EURUSD option with a strike of 1.1050, pay 0.0070 points or $700 to the broker for it for two weeks, and when the rate reaches 1.1120 we are “at home”, and everything above 1.1120 is already our profit.
BUT we can perform another operation instead of buying a CALL option.
SELLING PUT option.
We choose the entry point in the same way – strike, from where, in our opinion, the exchange rate of the currency pair can begin to move upward (strengthening of the Euro against the dollar, upward movement) – 1.1050 and switching the option type to PUT, we see that the broker is offering us a premium – 0.0065 points or 650.0 USD, which he will pay us if we SELL this option. We sell a PUT option for two weeks (Expire), the broker reserves a premium of $650.0 for us and what happens next?
Below are several scenarios for the development of the deal.
- If our expectations for the strengthening of the Euro were justified, two weeks have passed and the rate has not fallen below 1.1050, our Strike, we receive $650.0 of our bonus to our account.
2.The more the Euro strengthens against the dollar (the rate is up on the monitor), the more money will be generated in our account. For example, three days after the transaction, the rate became 1.1120, we will have an increase in the account (approximately) plus 120 dollars, but if this event occurs ten days after the transaction, then there may be 300 dollars, since before There is very little time left for the deadline to expire. And if 10 days before Expire the rate reaches, for example, 1.1300, then we will have (approximately) $500 in our account, since there is a very small probability that the rate will fall below the remaining four days before the expiration of the option (Expire) our Strike – 1.1050.
We can exercise our option at any time. You don’t have to wait until 2 weeks have passed. We saw that the account had “necessary and sufficient” funds that the option brought, we feel that there is a threat of collapse, which means you will receive a recommendation from us to close the option. After all, with invested funds (reserved as a margin at the broker) in the amount of $650.00, getting a profit of $300.00 is also not bad.
- Unfavorable development of events. If, when selling the PUT strike 1.1050 option, the rate drops to 1.0985 – below strike plus the expected premium – we begin to be at a loss. And here we usually look at the market. There may be three options – either close the option, or, if in our opinion, the downward movement is a short-term event – wait, or hedge the losses on the option with profit using a Spot operation in the same currency pair.
As always, you will receive clear, comprehensive advice from us.
You will be surprised, but we work with Sell options much more often than with BUY options.
An example of a recommendation for selling a Call option;
28.02. 23; 07:30 London time
NEW RECOMMENDATION
Option EURUSD; CALLSELL; Strike – 1,0615; Expire – 21.03.21/Premium – 0,0085 point;
An example of a recommendation for selling a PUT option;
28.02. 23; 07:30 London time
NEW RECOMMENDATION
Option EURUSD; PUTSELL; Strike – 1,0615; Expire – 21.03.21; Premium – 0,0085 point;
Comparing these two examples, we see that the broker and the market offer us a premium for selling a CALL option that is 10 points more than for selling a PUT option, all other things being equal – Strike and Expire. Why is this so?
There is no clear answer to this question. The market evaluates, the market offers. Of course, we look closely at this difference in ratings and take note of it in our ten-point checklist that we fill out before making a recommendation to you. But you don’t need to think about it too much. You are not a trader, you are an investor.
Our task is to provide you with the correct recommendation. Your task is simply to press the correct buttons and “flags” in your broker’s terminal.
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