As an option seller, whether to sell a real-value option contract or an out-of-the-money option contract requires comprehensive consideration based on market conditions, your own risk tolerance, and trading strategy. Because option sellers trade on margin, don’t worry if you don’t lose more than the margin, you will be forced to do so. To close a position, the following section explains whether it is better for an option seller to sell an in-the-money or out-of-the-money option contract? This article comes from: Option Sauce
As an option seller, you do need to consider multiple factors when choosing to sell an in-the-money or out-of-the-money option contract.
Let’s talk about real-value contracts first. The price of real-value contracts is relatively high, so the cost of buying them is also relatively high. Many novices will feel that buying a real-value contract is too high, and they will be accustomed to choosing out-of-value contracts.
Each type of contract has its own advantages and disadvantages. The disadvantage of real-value contracts is the high cost. Buying a lower one costs several hundred, usually thousands, but the advantages of real-value contracts are more obvious.
First of all, the fluctuation range of the real-valued contract is the best among the three contracts when the market fluctuates, which means that the profit opportunities are the most. Secondly, we must prevent the contract from choosing the wrong direction, because the closer the option contract price is to the exercise expiration On a daily basis, it is easier to return to zero. If the real value contract price is high, even if you buy in the wrong direction, it will not be easy to return to zero. If the market pulls back, you will have the opportunity to recover your capital or even make a profit.
Secondly, the market conditions are volatile in most cases, so the profit margin during normal trading is large and the probability is high.
Let’s talk about out-of-the-box contracts first. Let’s talk about the advantages first. The price of out-of-value contracts is low, so the cost of buying them is naturally low. You can buy dozens or hundreds of contracts compared to hundreds or thousands of real-value contracts. You can buy a lot more. Secondly, if there is a sharp rise or fall in the market, the volatility of the out-of-value contract is the largest among the three contracts. For example, on February 25, 2019, the Shanghai Composite 50 rose by nearly 7%, and the 50ETF option rose by nearly 7% that month. 192 times.
It can be seen that when the market is relatively large, out-of-the-money options can also bring about very good gains and a certain amount of income. At this point, we can talk about the disadvantages, because out-of-the-money contracts can only be used when the market rises and falls sharply. There will be very good fluctuations, but most of the market is usually volatile, so in most cases it is difficult to make a profit by buying out-of-value contracts. Also, if it is close to the expiration date, the out-of-value contract will easily return to zero. , although it may only be a few dozen yuan, or a contract bought for one or two hundred yuan, you may not think it is much, but if you buy more, you will naturally lose a lot.
In addition to market conditions, your own risk tolerance and trading strategy, there are also the following factors worth considering:
1. Volatility: If market volatility is high, the price of an out-of-the-money option contract may fluctuate significantly, resulting in higher risks for the seller. In this case, selling real-the-money options contracts may be more stable and safer.
2. Interest rates and inflation: If interest rates and inflation are high, the value of real-money options contracts may be affected.
Because the exercise price of a real-the-money option contract is lower than the underlying price, this means that purchasing power may decrease in the future, thus reducing the value of the real-the-money option contract. In this case, selling an out-of-the-money option contract may be more appropriate.
3. Time value: The time value of an option refers to the portion of the premium that exceeds the intrinsic value. For the seller, selling a real-money option contract will result in a smaller premium, but at the same time he will have to bear the loss of time value.
Selling out-of-the-money options contracts will earn more premiums, but at the same time you will need to bear the loss of time value and higher volatility risks.
Therefore, the impact of time value needs to be weighed when considering selling an in-the-money or out-of-the-money option contract.
4. Trading volume: If the trading volume is large, selling real-money options contracts may face liquidity risks. Because in-the-money options contracts typically trade in smaller volumes than out-of-the-money options contracts, this may make it difficult for the seller to close the position at the desired price if desired.
Out-of-the-money option contracts, on the other hand, are generally more liquid and can be bought and sold more easily.