Surprising Key to Option Selling Returns Managing Your Margin
It is a common axiom in the National Football League despite the half Attention That highlight reels and generated by the offensive side of the ball, it wins championships That is DEFENSE. Anyone doubting this age old wisdom to consult Apr want Peyton Manning and the Indianapolis Colts – the most prolific in the NFL Offense in 2009 – foiled by a single defensive play on Super Bowl Sunday. Same This piece of Knowledge Can Be invaluable to a neophyte investor selling option – as it pertains to Especially commodities options. For if I Could give you a single piece of advice in the years earned from selling option arena it is this: Always cover your downside first. In option selling, MOST of your trades Will Be winners. Winning option sales are easy. Sell ??it and ignore it. It is how you handle your losers That Will determine your results in overalls selling an option portfolio. Defense wins Championships. And it is defense That Will allow you to keep double digit returns earned Those your option writing by Offense. “Where do we get out?” is a common question we get from prospective investors. Obviously individual Exiting positions is an important part of managing Overall Risk. Howeve, MOST new focus on the Investors fail to see trees and the forest. For it is less individual positions About how are managed and the portfolio more about how as a whole is managed. And the initial and important aspect of your MOST overalls your portfolio is available, non-invest cash – or as it is in a futures account Called – your Margin. The Hidden Art of Management Commodities Margin options are leveraged vehicles. While this leverage (not volatility) is responsible for the Mostly High Risk reputation of commodities, it is Also What Makes the high returns possible in an option selling portfolio. It is the misunderstanding and mismanagement of This leverage THUS That is MOST responsible for Losses Often Experienced by novice commodity traders. The biggest mistake I see new Investors make a commodities portfolio Treating is like a stock portfolio. These are not equities. These are not equity options. Structure your portfolio like a stock portfolio (100% of your working capital), and you are going to be over-positioned and setting yourself up for losses. Use your funds CORRECTLY, and you put yourself in a position to generate outsized returns. If There Is I Have Learned anything in my years as an option seller, it is to keep a large Percentage of your portfolio in cash. I recommend the Following to new commodities Investors setting up a selling option portfolio: Conservative Portfolio – Moderate Portfolio Cash 50% – 40% Cash Aggressive Portfolio – 30% Cash Why do I hold this much of my investment capital in cash? To sell a futures option, you as the investor, put up a deposit must-in order to hold That option Until You Either buy it back or it expires. This deposit, in essence, is your investment in That option. In commodities, This post is That You deposit a margin Called Requirement. The margin Requirement to hold your short option Can Change, Depending on Movements in the Underlying market and the value of your option. For instance, if the market moves and the position Against Your value of your option Increase, your margin Requirement option for That Can Increase. Consequently, if the value of your option decays, drop your dog Requirement margin as well. Your Objective in your portfolio (and one of the main Reasons you sell options in the first place) is to give the market plenty of room to move Without forcing you out of your position. Keeping a large cash cushion That You Have insured plenty of Excess cash to cover margin Any short term Increases in your positions. Sometimes commodity Novice Investors Will View this as equity Which is not working for them. This is not true. Back up equity is playing a vital role in your portfolio overalls. Upside to Adequate Cash Reserves: Ensures you do not over-Position Provides staying power to ride out short term price moves Adverse (More winning trades) Virtually Eliminate Concerns Smaller margin call positions reduce the impact of one bad trade on commodity option Novice Overall portfolio Often sellers Even 80-90 Use 100% of the capital account to hold in Their positions. This results in Being Often Forced Out of Their positions on Even The Slightest hiccup in the market in order to account for small Increases in margin requirements. That You Will not make mistake. Keeping an Adequate cash reserves do you insure Will not over-position and give you the staying power you need-to ride out short term market swings Against your position. Combined With A Properly Diversified deep out of the money option selling portfolio, Keeping this much cash equity in your Will Virtually Eliminate chances of ever Receiving a margin call – a fear voiced by new commodities Frequently investors. Finally, and MOST importantly Possibly, adequate cash reserves Ensures That your positions in the markets you select Diversified Will Remain manageable. THUS, Even if you find yourself in a losing trade, it’s Impact on the Overall portfolio Should Be marginalized. Picking winning trades always gets the glory When Discussing option selling. Howeve, as it is in life and sports Often, it is the nitty-gritty details to determine Often That winning campaign. Selecting options to sell for premium is more fun. Protecting your backside Will determine how much you keep of That premium. Remember, Defense wins championships. *** The information in this article compiled from Has Been Carefully Believed to be reliable sources, accuracy is not STI But guaranteed. Use it at your own Risk. Risk of loss There is in all trading. Past performance is not indicative of future results Necessarily. The Option Traders Should Read Before trading options Disclosure Statement and Should Understand the Risks in option trading, Including The Fact That option is an Any Time sold, There is an unlimited Risk of loss, and when to an option is Purchased, the Entire premium is at Risk. In Addition, Any time an option is sold or Purchased, Including Costs transaction brokerage and exchange fees are at Risk. No representation is made That account is likely to Any Profits or Losses Achieve Those Shown similar to, or in Any amount. An account Apr Different results Depending on experience Factors Such as timing of trades and account size. Before trading, one Should Be Aware That With The Potential for Profits, There Is Also Potential for Losses, Which May be very large. All Opinions Expressed Opinions are current and are subject to change Without notice.