While we may be talking about how profitable and consistent money can be made by selling options, some traders have popped the most fundamental but yet critical question on what type of options to sell. Our context here refer to stock options, ETFs options or futures options.

Most options sellers may be familiar with the concept of selling options against equity which can include stocks or ETFs, but selling options against futures contract may be a wholly new ground to them. The basic principles may remain generally the same, but one must be aware of certain aspects which could make one more appealing or fearful than the other.

ETFs options work very much the same as stocks options. They are treated like just normal stocks except that while stocks can crash to zero value, the possibility of ETFs crashing to zero is extremely small, which I will not commit to say zero. Something very drastic must have happened to the market to cause this to happen since ETF like SPY comprises of some of the strongest companies listed in the exchange. And for that reason, I generally prefer to sell put options on ETFs. Of course, that's just my preference and I believe you have yours too.

I have heard of some traders who did options selling on stocks and I mean on big companies which failed. Depending on the risk management approach that was taken, disastrous to the trading account could have been avoided or minimized then.

The risk associated with selling options on stocks may there before be perceived as relatively higher and thus lead to a possibly higher margin. Premiums obtained from selling stock option and future options differ. Margin requirement from selling stock options can be 10, 20 times higher than the premium collected while that for future options can be just a few times higher. The return on investment is thus viewed as better for doing options selling on future contracts.

Strike price consideration is also a critical factor when deciding between stocks and futures options. For future options, it is possible to sell very far OTM options and yet collecting a reasonable amount of premium for it. However, for stock options, one would have noticed that after just a few strikes OTM, the premium to a miserable amount which might not be worth the risk to do so.

With a lower margin and the possibility of obtaining a substantial premium for very far OTM options, futures options appeared to be much more choice than stocks options at this moment. However, one must be aware that futures come with contract dates which they mature or expire. They are unlike stocks or ETFs which one can hold upon assignment on the expiration dates. Risk management for futures and stocks options selling it different. Futures contracts like the E-mini S & P (symbol ES) also come with different contract dates, eg, the September, December contract etc. ES options expiring in the months of October, November and December are associated with the underlining future contract which expires in December. Such knowledge can be important to a trader who is trading these options though the price difference between the various future contracts can be small.

Hope this article has been helpful to you if you are thinking of embarking on the opportunities options selling track.

Good luck!

AD2 (adsbygoogle = window.adsbygoogle || []).push({});

Source by Uktank A