Steady profit with option selling

RESULT: Selling options on sugar (second time)

As promised, I want to give you an update about the sold options on sugar as I wrote in my post on September, 14th. It has been a long time, but do not worry, I did not forget about that. So, here you go:

To refresh memory, I presented the market idea about selling put options on sugar “SB” for JAN’18 (expiring on 15 December 2017) at the strike price 0.1275 while collecting a premium of $134,4 per option.

In simple words, by selling this put option, one assumes that the price of sugar will not close below 0.1275 on 15 December 2017. It cannot even go below in the meantime to eliminate any unnecessary risk. When the option was sold, the price of sugar was 0.1485. Basically, the price of sugar could decrease, move sideways or ideally go up. This would cause the option to start losing value and the option seller to start making profit.

Creating regular income thanks to option selling

The put option on sugar was bought back on October, 31st, for $22,4 which was done automatically by a limit order. Hence, the result was a profit of $112 per sold option.

It took a while. The trade went for 46 days because I was not exactly right about how the price of sugar will move. But that is all right. Option selling is very forgiving. You see, one can make a profit even if you cannot foresee the future. It is enough when you do not do a big mistake.

Closer look at the chart

Let’s have a look at the chart of March sugar futures. The first blue vertical line, in the chart below, shows when the put option was sold (September, 14th). The second blue line shows when the option was bought back automatically (October, 31st), by a limit order. Indeed, I did not chose the best moment regarding the price of sugar. It was almost always below the entry point. That is still fine because time and implied volatility worked for the option seller and decreased the value of the option. At the end, the price of sugar was 0.8% lower and despite that, the put option lost 80% of its original value. Hence, resulting in 80% profit for the option seller.

Chart of sugar futures

By the way, that was really good that the option was bought back exactly on October, 31th because the price of sugar went down again in the last two days. However, even if it had not been bought, it would still not have been something to worry about. The strike price of the relevant put options is still far away, at 0.1275. This price is not even visible in the chart above. Plus, options lose part of their value every day as time flies.

Learning from winning as well as from losing trades

Regular income from options sellingThe goal of this post is to introduce the concept of option selling to a broad audience because I believe it is a very useful concept. These small trades show how to earn additional and regular salary while following few simple rules.

I recently received a comment that it would be good, if I present also my losing trades, not just those which are successful. This was an excellent comment, which I very much liked. I will certainly explain losing trades much more in detail pinpointing mistakes that I made.

Nevertheless, I always present the market idea first on this blog as soon as I enter the trade without knowing whether the sold options will end up as a losing or winning position. The great thing on selling options is that the probability of the trade ending up as a winner is high. If you stick to your rules and you sell options out-of-the-money with delta of about 0.10 or 0.16, you are on the right track.

Selling options provides the much needed edge

Delta namely shows, among other things, how probable it is that an option will end up in-the-money. Delta 0.10 means, the option has 10% probability to end up in the money at the expiration day. In other words, there is 90% chance, that it will not end up in-the-money. Hence, it will result in a profit for the option seller. That was the case with all market ideas introduced on this blog since its creation. There were also not so many market ideas, but hopefully the number will grow.

This post should not present me as a great trader. On the contrary, it shows that even if the timing is not right and one does not have a crystal ball, option selling is a working strategy. It can lead to a regular income on the financial market, despite people not being always right about the price movement.

I hope that you like this format of introducing market ideas and subsequent reporting about the results. It is fun for me to write it here, on Premium-Flow, even though it is not a trade recommendation.

Do not forget sound money management

By the way, I follow a rule that one position cannot exceed 2% of the whole portfolio. This is an extremely important rule that can save a lot of troubles. The rule means, if I want to sell one option for $134,4, I need to have an account of at least $6.720 in order not to undergo too high risk. If someone has an account of e.g. $14.000, he or she can sell two such options and still comply with a sound money management rules. That way, the position will not represent more than 2% of the whole portfolio. To sell three such options, it is recommendable to have an account of at least $21.000 and so on. I am sure you get the point.

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