One of the more recent, popular options strategies recently has been to write naked put options that are out of the money.
This strategy is most often used during periods of rising markets.
This makes sense because during market rises, the options seller (or writer) is less likely to have to purchase the underlying securities.
Best Time to Write Options Ultimately, when the share price is rising, the put option's price will drop.
But the other attractive feature when it comes to writing these options is that time decay helps the seller, since each day will erode part of the value of that option's price.
This is particularly noteworthy with the out of the money options which are so popular, since there is no real intrinsic value to the option to begin with.
With this in mind, the best time to write naked put options is in periods of steady market and/or security price increases.
Not only will a rising market widen the gap between an out of the money option and the security's price, but each day the market increases, more and more of the option's price will decrease.
High Volatility However, one of the noteworthy factors that cause undue risks to the options writer is high volatility.
Since market prices rise and fall on a regular basis just as waves in the ocean rise and fall, any deviation from a regular pattern will pump up the volatility index and thereby increase the value of the option (known also as Vega).
Higher volatility means margin calls for naked put options writers and, as a result, less cash on hand.
High volatility also increases the potential for the security price to drop to a level where an out of the money option becomes in the money.
This typically will not cause the option writer too much grief unless the strike date is close to the strike date, at which point the option will be put.
Alternatives Any option will increase in value based on volatility.
Likewise, they will drop in value with every passing day (time decay).
When someone is writing naked puts, the objective is normally to provide income into portfolio.
An alternative to puts during periods of higher market highs is writing covered calls.
This strategy allows the option writer to avoid the risks associated with a sharp, higher volatility (VIX) correction.
However, in periods where volatility is considered low or is in the process of getting lower and the overall market trend has been on the rise, writing naked puts may be the best income-producing strategy for one's portfolio.
This strategy is most often used during periods of rising markets.
This makes sense because during market rises, the options seller (or writer) is less likely to have to purchase the underlying securities.
Best Time to Write Options Ultimately, when the share price is rising, the put option's price will drop.
But the other attractive feature when it comes to writing these options is that time decay helps the seller, since each day will erode part of the value of that option's price.
This is particularly noteworthy with the out of the money options which are so popular, since there is no real intrinsic value to the option to begin with.
With this in mind, the best time to write naked put options is in periods of steady market and/or security price increases.
Not only will a rising market widen the gap between an out of the money option and the security's price, but each day the market increases, more and more of the option's price will decrease.
High Volatility However, one of the noteworthy factors that cause undue risks to the options writer is high volatility.
Since market prices rise and fall on a regular basis just as waves in the ocean rise and fall, any deviation from a regular pattern will pump up the volatility index and thereby increase the value of the option (known also as Vega).
Higher volatility means margin calls for naked put options writers and, as a result, less cash on hand.
High volatility also increases the potential for the security price to drop to a level where an out of the money option becomes in the money.
This typically will not cause the option writer too much grief unless the strike date is close to the strike date, at which point the option will be put.
Alternatives Any option will increase in value based on volatility.
Likewise, they will drop in value with every passing day (time decay).
When someone is writing naked puts, the objective is normally to provide income into portfolio.
An alternative to puts during periods of higher market highs is writing covered calls.
This strategy allows the option writer to avoid the risks associated with a sharp, higher volatility (VIX) correction.
However, in periods where volatility is considered low or is in the process of getting lower and the overall market trend has been on the rise, writing naked puts may be the best income-producing strategy for one's portfolio.
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