Writing options for a living

Option writers are the only people who consistently make money (in bullish or bearish markets) and rarely ever lose!

Option writing is a profitable and interesting concept. It is interesting because the profits are limited but investments are high (margin against possible losses).

Option writers typically trade the time decay and volatility; the extent the market moves is secondary! On the contrary, the option buyer has a good chance of earning only if the market shows fast moves.

So why would anyone in his senses write options?

Recall that for option buyers, if the targeted price is not achieved within a certain number of days, he has lost money. So the option buyer needs to be sure of the trend so that he can make money. Also recall that towards expiry, the premium will progressively reduce to zero if there is no change in the value of the underlying...this is because of the time-decay factor in option premiums.

It is the premium component (time decay factor) which excites option writers. The income is fixed but certain if you get the trend right and are smart enough to do some clever hedging.

In reality, option writers rarely ever lose money.

Investment required

The investment is the same as that payable on the futures less the premium component.

Example - for writing a Nifty (call or put) option strike price 4000 with premium say Rs.100/-, the amount required is 4000*50*15% - 50*100 = Rs.30,000/-.

Here, 15% is the margin rate fixed by NSE for nifty derivatives and 50 is the market lot.

Slow and steady wins the race

Always. And this is true of the stock markets as well.

While most investors are driven by greed and high profit targets, option writers are satisfied with relatively low returns. They are not interested in 50% gain in a month...in fact they are very happy even if they earn 10% per month. Eventually the option writer wins as this money is assured even if the markets are bullish or bearish.

Should you write options?

Yes. If you are looking at fixed returns irrespective of market direction, then option writing could be for you.

Note that while option buyers are small investors, option writers are extremely clever and smart traders who rarely lose money.

In fact, all over the world including India, option writers are the only people to consistently make money. And this whether the markets are bullish or bearish!

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