Play Bookmaker Writing Put Options
Jason Ng
If you have ever placed any bets, you would know that the mortal who wins most of the time is the bookmaker. Do you know that you too can be a ?bookmaker? in the options market by writing place options? Not only can you play ?bookmaker? by writing place options, you are actually also playing ?insurer? where you get paid a premium for doing so no matter how things work out! Let me show you how!
If you have ever traded options, you would have bought call options if you think a stock is going up and bought place options if you think a stock is going down. You would also have been frustrated over the fact that these options you bought decay in value every day the stock doesn?t move and eventually expire worthless if the stock doesn?t move by expiration. This phenomenon is known as Time Decay.
Time decay is the number one enemy of traders betting using stock options. When you buy options, you pay a premium for owning the contract. This premium reduces as expiration draws nearer and if your bet doesn?t work out, you lose the bet and the premium that you paid. Now, who is making all that money that you see decaying regular in your trading account? The mortal who sold you those options! He is your Bookmaker in that trade! That prefabricated options trading sound like a lottery contest doesn?t it?
This premium is known as the extrinsic value in options trading and is what you pay the mortal who sold you the contract for the risk that mortal take.
Now, since in a conventional bet, the bookmaker or the insurer makes the most money, won?t you want to experience how it is like to be in their position? Yes, you could do that in options trading by writing options instead of buying options! Instead of watching time decay reducing the value of your position in pain, you will now see a grin grow crossways your face. Yes, time decay becomes your friend now.
If the mortal who placed the ?bet? loses and the stock didn?t move as that mortal predicted, you get to keep the ?bet? money as ?bookmaker?. See how this works? Now, do you see more winners or losers around you in a bet? Would you rather be bookmaker or the ?gambler??
Now, what about risk?
There are people who win in bets aren?t there? Won?t we have lost money being bookmaker if people win?
That is why there are two golden rules to stick to when playing bookmaker by writing options. First of all, you never play bookmaker to only one trade. You do know what most people lose their bets but there are always a few winners, so you should always diversify and write options on several trades, not just one. Secondly, you always write place options, not call options. Now, this second rule requires a bit more elaboration.
Why do you only write (this means sell in options trading) place options? When you write place options, you are giving the mortal buying those place options the right to sell the stocks to you at a fixed price. In simpler terms, you write place options to people who are betting that the stock is going to go down. Now, unless you are reading this in one of those once-in-ten-years recession bear markets, most stocks go up. This automatically puts the odds of winning against the mortal buying your place options. Secondly, even if the mortal who buys your place options wins and sells you the stock at the strike price, you would still end up with stocks which you could hold for the longer term and benefit from its dividends and future capital appreciation! Let?s say you write place options on your favorite stocks, if you win, you win money and if you ?lose?, you get to hold your favorite stocks at a price which you chose to when you write the place options and gets paid dividends (so make sure it?s a dividend paying stock)! Isn?t that a win-win situation?
Yes, this is why writing place options is such a favourite options trading approach recently.
Now, you may ask, what if you do not have the money to buy the stocks from the mortal whom you sold the place options? Well, your broker would have prefabricated sure that you have the money to do so in the first place before allowing you to write the place options. This is known as options margin.
To improve your chances of winning at writing place options, you should also write only out of the money place options. This means writing place options with strike price lower than the prevailing stock price. The lower the strike price, the more the stock has to drop for the mortal who bought your place options to win, hence the lower the risk for you. On the other hand, the lower the risk, the lower the profits become for you. This is the same bookmaking principle everywhere.
But, before you go out there and start to play bookmaker by writing place options, you must have a comprehensive knowledge of place options first! Read our tutorial on Put Options at http://www.optiontradingpedia.com/put_options.htm .
Jason Ng is the Founder and Chief Option Strategist of Masters ‘O’ Equity Asset Management and author of an Options Trading education site, Optiontradingpedia.com. He is a fund manager specializing in options trading and his revolutionary Star Trading System has helped thousands. Read more about Put Options.