How much money can you make as an Options Seller?

Short Answer

Option Selling can be considered as a full-time business for traders. Similar to a business, you cannot expect extraordinary returns in options selling. You, as an options seller have an edge over option buyers and the chances of making money are higher. Know how much money can be made by selling Options.

Detailed Answer

Options Selling

An Options Seller is someone who sells an options contract and later buys it back at a lower price to earn a profit. Options are traded based on an obligation to buy and sell the underlying asset at a later date, at a particular price. Options prices move as per the underlying asset. Therefore, if the view of the option seller is right, the decrease in the premium of the options contract is a profit for the option seller and a loss for the buyer of an option.

Chances of an Option Seller making money

Options trading is a game of skills and probability. There are many factors involved in an options price known as the Options Greeks. Some of the important Option Greeks are Delta, Theta, Gamma, etc.

The chances of making money in options not only depends on the view of the trader but also the options greeks. “Theta” always works against the option buyer whereas theta is the main gaining factor for an options seller. Theta means the Time decay in options due to which an OTM (Out of The Money) Option expires worthless (0) on the date of expiry.

Due to this, an option seller generates some profits even if their view goes wrong. This is because of the time value in an option contract. The overall gaining probability for an options seller is more than 66%.

How much money can an Options seller make?

Now to address the burning question, There is no formula or specified rate that can define exactly how much an option seller can make. Although the probability of profit is more than double that of an option buyer. Still, the maximum profit that you, as an option seller can get is capped at the total premium received.

Options Selling requires much more margin money as compared to option buying. On the other hand, option sellers can get the margin benefit if they hedge their positions. In this way, you secure your position from any unforeseen circumstances that can lead to massive losses.

Hedging a position reduces the overall profits but more importantly reduced the downside risk in options selling.

Let's take an example of a hedged option selling strategy known as 'Iron Condor' to get an idea of the ROI (Return On Investment)

In an Iron Condor strategy, which is a multi-leg options strategy, 2 call options and Put options are bought and sold.

At the current market price of Nifty, to implement an Iron Condor, the total margin money required is Rs 36,500. The maximum expected profit of this strategy is Rs 3500. Hence the ROI on this strategy turns out to be more than 9.5% in a time span of 2 weeks. The maximum loss is capped at Rs 1500.

In this way, it is clear that you can make anywhere between 7 to 12% ROI easily in Option selling with a hedged position. Here, both the profits and losses are capped to a certain extent.

Conclusion

Option Selling should be considered as a business and you should not expect unrealistic returns out of option selling. Although the probability of success is 66%, the maximum loss in the case of an option seller is ‘unlimited’. For this, it is necessary to hedge your positions and get the margin benefit in option selling.

Tagged With: Options TradingOptions SellingReturn On InvestmentDerivativesStock Market
Categories: Option Trading
Ask your query and our expert community would be happy to help
Discussion (0)
Related FAQs

How much money do you need to begin Options Selling?

Option Selling requires large capital. Due to this many small retail traders resort to option buying where the margin money required is very less. Although with various strategies you can reduce your overall risk and margin required in Options selling. Know more about how much money is required to start option selling. The difference in the margin money required for selling a naked Option vs Selling a Hedged Option here.

What is Open Interest in Options Trading in Stock markets? Examples

Open Interest is a parameter used by technical analysts and options traders to judge the mood of the market. Open Interest is the total number of outstanding option contracts in a particular strike price of an underlying asset. The OI is an important factor as it defines liquidity and the total number of contracts that are traded at a particular point in time.

Is Paytm Money Safe and reliable Broker for Stock Trading & Investing?

Yes, it is completely safe to invest your money in the stock market using Paytm money App. In fact, PayTm has come up with stock broking services recently and trying to establish itself in the said field. And, to give tough fight to top existing players it has to keep its services up to the mark. Paytm Money made a big name in mutual fund investment industry and now it's time to see its performance in the stock brokers' world.

How much money do I need to start Stock Trading in India?

Its all based on the share you wish to purchase. You can invest one rupee or two rupees in the stock market while there is no maximum cap on your investment.

Is it possible to make Rs.5000 to Rs.50,000 of profit in a single day in the stock market?

Generating 1000 times returns in the stock market is highly unlikely but not impossible. However, through aggressive trading, scalping techniques, trading in penny stocks, strategies for trading, technical analysis and trading with the market trend, you could get the relevant returns you’re looking for, provided everything favors your decision-making in the desired investment opportunities.

Can I trade or invest Rs 100 in the share market of India?

You can definitely trade or invest Rs 100 in Indian stock markets. There are no monetary requirements to enter the stock market hence you can buy any share that is trading under Rs 100. Apart from direct stock investing/ trading, there are some indirect ways to own shares over Rs 100. This can be done through Mutual Funds.

Where to invest money for good returns in India? High Return Investments

We all look to earn good returns on the money we invest. Putting money in High return investments is one way of generating better income. The different places to get good returns are mutual funds, equity, and gold investment in India.

For long-term investments, which channels are viable for significant returns given the current market scenario?

For significant returns, one can look forward towards stock funds, real estate investments, dividend stocks, target-date funds and so on. Each one of these investments does offer something better to investors based on their capital of investments made.

Are healthcare stocks the new best investment for significant returns?

Healthcare stocks are quite beneficial in the given day and age, all thanks to its impact on the country. They have grown in the evaluation and even providing considerable returns that nobody would have predicted. Therefore, research the stocks that you wish to invest in in the long term and see how it pans out over 10-20 years.

Which strategies should a Options Buyer use to make money?

Option Buying is more common when compared to options selling. This is because option buying requires less capital and the maximum profit is uncapped. This lures many small retail traders who ultimately lose money when it comes to options buying for various reasons. Follow these strategies to increase your chances of generating profits.