Three weeks ago, I presented the idea to sell put options on sugar. Today, the sugar trade has been closed with profit. Income: $110 per sold option. $105 when I consider all fees. Let me provide you with a short update.
On August 23, I wrote about selling put options on sugar “SB” expiring in Nov’17 at the strike price 0.13 while collecting a premium of app. $145 per option.
For better illustration, you can see the trade below on the chart. The vertical line represents the day when the put options were sold. The horizontal line represents the strike price of 0.13. When selling put options, the aim is that the price of sugar will not go below the strike price.
As you can see, the price did not really sky-rocket. It was a little bit higher than the price at a time when I sold the option. The price of sugar really moved rather sideways. Despite that, I was able to buy back the option just for $33,6. That means, just about 20% of its original value ($145 per option). How is that possible?
The magic of selling options
Although, the price did not move much, two other factors worked for me.
- Time: When I sold the option, it had still 55 days until expiration. Every day, the option lost a little bit of its value because of time decay. It goes as follows. The option buyer has the right to sell the sugar contract for 0.13. However, the price is currently high above this value and therefore the option buyer can sell the sugar contract directly for a higher price. As time flies, there is a higher probability that the price of sugar will stay above 0.13. Today, the option is valid just 34 days until it expires. These three weeks were enough for the option to lose 80% of its value.
- Implied volatility: I sold the option when the implied volatility was high. That means that the price of the option was also high. In normal circumstances, implied volatility always returns to its mean value. In simple words, when an implied volatility is high, it will decrease at one point. It will not stay high too long. In this case, a slightly decreased implied volatility contributed to the decrease price of put options on sugar.
Everybody can do it
I write this blog to spread the message about the concept of selling options. I find it a great concept of how people can improve the monthly income. This trade does not show whether I am a good trader, it shows how easy this concept is. The probability is on the side of the option sellers and time works for us.
Sure at the beginning, you need some knowledge about selling options, but this is the case with everything. Once you learned the basics, selling options will take you maybe one hour a day and it can provide you a nice additional income.
Premium-flow scores again.