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West Central Ohio | The real risk is that you have a limited profit potential (the $3 you earned by the sale of the options) and unlimited (theoretically) loss potential. If held till expiration, and beans were either less than $10 or more than $16, you lost all your money, and potentially much more. Beans would have to be at exactly $13 for you to earn max profit.
You mentioned time erosion. Yes, everything else being equal, the value of the options will decay over time as you approach expiration. But the value of an in-the-money option (which one of the two will always be) adjusts more quickly with a change in futures price than an out-of-the-money. So, the $3 premium you earned by the sale could get quickly eaten up by a change in the futures price.
That said, that is what selling options is all about, earning that time premium. However, a safer strategy may be to sell OTM options so that you have more "wiggle room" before they are ITM. Less premium earned initially, but less risk. | |
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Do any of you trade options in this manner?
