Option Selling as a Business

  1. Robert,

    If you sell an option for 800 dollars and the price of the underlying goes TOWARDS your strike price the option you sold will increase in value and will be more expensive to buy back (close)

    Example- let’s say you sell a July 40 PUT in crude for 800 bucks and crude goes down that 40 put will go UP in value. When the value is at 1600 (because crude keeps dropping) you would close your option by purchasing it back at 1600 leaving you an 800 dollar loss.

  2. Robert Wilhelm Says:
    March 21, 2017 at 7:47 pm

    In regard to the 200% rule; how can an option that I sell for 800.00 become 1600. It seems that the sold option of 800.00 will become banked when the option expires and I then get to keep the full 800 or 100% of the premium.

    • Michael Gross Says:
      March 22, 2017 at 4:11 pm

      Robert,

      When you sell an option, you want it to go to zero value and expire worthless – as you described. If, however, the market makes a sharp move against your position, the option could increase in value – putting you at a “paper” loss. The 200% rule says you should cut that loss (making it a realized loss) when it reaches 200% of your original premium.

      For more information on this, I recommend watching our risk management video on the “video lesson” page of our website.

      I hope that helps.

      Regards,
      Michael

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