Option premium is one of the most interesting elements of options selling. It is basically the regular income you get as an option seller. Therefore, let’s have a look what offers a better premium: Futures options or stock options? This is another post from our series exploring these differences.
First of all, we need to find out how expensive is the underlying asset on which we sell the options. One futures option usually relates to one futures contract. Taking few commodities as an example, a crude oil contract costs around $50.000, one coffee contract costs also around $50.000 and a gold contract would be traded now for approximately $135.000*.
Speaking about stocks, one option usually relates to 100 shares. Hence, if you sell an option on Apple, which currently costs around $160 per share, the amount would be $16.000. Apple is not the cheapest stock and you can still receive quite a good option premium. Therefore, it is a good example. As you can see from the above-mentioned, we usually “move” a greater amount of money when selling futures options. Consequently, the option premiums are, as a rule, higher in the “futures options” area.
*Note: If you never heard about options before, do not worry, if the numbers look scary. You do not need to have $50.000 to sell an option on crude oil or coffee while sticking to rules of sound money management. However, this would be another topic for discussion.
Futures options offer higher option premium
In general, futures options have the advantage that we receive more money (option premium) when we sell them. The higher option premium allows us to sell the option far out-of-the-money. Hence, when the price move differently than expected, there is a bigger safety net. The price would have to move significantly to our disadvantage for the option to be in-the-money and I would not sit and wait for that.
It is fair to mention another reason why I receive higher option premiums with futures option. I sell them with a longer expiration dates. You might eventually do it also with stock options, but there are the earnings reports of the company published every three months. It is not advisable to write a stock option in the time of earnings (if you do not follow a specific strategy trading earnings) as the stock becomes very volatile. Therefore, it doesn’t make much sense for me to sell a stock option with more than 60 days to expiration.
On the other hand, if you have a small account of let’s say 5.000$, the stock options might be a better choice. Since you get smaller option premium, the potential risk of loss is also smaller if you stick to your rules. In addition, you might be out of that trade relatively quickly. Sometimes, in a matter of few days. Another advantage of stock options is that you might collect option premium while owning the stock and selling there options. In that case, the risk would be only in the stock, not in the option itself. There are some well-established strategies how to collect additional income from your stock portfolio while using options. One of these strategies is called covered call writing and you might have already heard about this. Specialty of stock options.
I personally like to have in my portfolio sold futures options as well as stock options. Both offer specific advantages regarding the options premium. Additionally, it is good to assess the general sentiment in the markets. If the stock market is nervous, I focus more on futures option. Implied volatility plays also a bigger role when I select options to sell.
What about you? Do you sell futures options as well? Do you see any differences in option premium between futures- and stock options? I will be happy to receive your comments.
The next topic that we will together examine will be the liquidity. Where are more buyers and sellers, in the futures option or stock options? That will be the topic of the next post in this series. Stay tuned.