Im sure many of you experienced folks can answer this and I hope it hasnt been answered already.

My question is if I sell a call on the XDE at 1.30 and the spot price is at 1.26 if the price doesnt reach 1.30 at experation I keep the premium, but how much can I lose if the price goes above the 1.30 ?
Second part is how does one keep from unlimited loss? Do you buy back the call before it reaches 1.30 ?

Thanks for the help !!

Earl R. Virginia

Hi,

to answer your question I will first explain that I personally trade OTC(over the counter ), that means I can choose my expiration date and strike prices with more flexibility than the options contracts which give you specific expiry dates and strike prices.

However, coming to your question one thing is important to note: selling naked options(means an option without any other hedge in this particular position) is riskier than buying options as in selling options your risk of losses is unlimited but your gain is limited to the premium you receive upfront. I know it sound scary but read further to understand when you actually start accumulating losses.

To hedge an option like in this example one could go long the spot at a specific spot price position to cover the sold call.
I personally have a different strategy which I will explain in a mo....

if you sold a call with a strike at 1.3000, then you surely got a premium on this right(let's says you got a premium of 400 pips when you sold the option at the time the spot was trading at 1.26 ok). so that means if the price goes against you, you want to know when yo start accumulating losses: in this case your premium is the maximum you can get if the trade works in your favour and price stays below 1.3,however any price above the strike price is going to compromise the premium.

your breakeven point on this trade would be approximately(excluding commissions and spread and so on) around a price when the spot is trading at 1.3400 beacause strike price plus premium you received when you sold the option=1.34. If the spot price is trading anywhere above this 1.34 at or near expiration, then you start accumulating losses.

there are three ways to overcome this in my opinion
1. you watch the price closely and get out of the trade and opt to get out of your options position facing a small loss( maybe even a gain) when you see it is not going the way you planned it you can buy back the call anytime before expiration but because of the initial spread at the time you sold the call you will incure the loss of the spread additional to the commissions you pay.
And having said that, the spread of the bid and offer price on options is larger than in the spot market.lets say you would wait one week and the spot price went further down to 1.24, well in this case you probably will even make a small profit if you buy back the option before expiry.
In another scenario, lets say the spot price has moved
closer to 1.3 in after one week you entered this position it trades around 1.28.In this case you will have to face a small loss on this traid if you buy back the opition before it's expiry date.

2. you already hedged your options position with a long in the spot position as I mentioned above.( This also can be profitable but not as much as the premium you would get if you sold the option alone,means naked option)the profit on this hedged strategy depends on the stike prices of the option and the spot at the time you entered the positions but to explain this hear would got to far now.

3. this is what I prefer and which gives me more room to get a full advantage of the option I sold: I enter an order with my broker to buy the spot position at a price around the pain threshold (thats how I call it)which in this case would be around 1.34. In this case I would also put a stop loss on this long spot position( I personally choose to do so if I still cannot see a direction or trend in either direction) that would mean I am determined to stay in my options position but am willing to take a small loss on the spot if the tide turns near my options expiration date. This scenario I just explained is the worst case scenario only to protect your options position if things go really bad. But nevertheless I think it is better than selling naked options as this can accumulate far higher losses.

I hope this makes some sense and helps you, good luck with your trading

Ali K.

Ali,
Thanks for the reply,it answered all of my questions and you opened my eyes to a few things I didnt know.
Could you recommend a broker that offers OTC options ?
Again thanks for all the help..


Earl R.

Hello Earl, I certainly can tell you about the broker I am with, but I am not sure if I can give it away publicly on this website, therefore if you write me an e mail on This e-mail address is being protected from spambots. You need JavaScript enabled to view it , I will be happy to tell you about my OTC broker and about it's pros and cons, besides I am sure one can do an internet search an pick a good broker based on criteria such as margins and wether one can trade both spot and options on one platform and spreads and comissions and so on, however it all depends.....so I hope you understand my hesitation not to advertise publicly for a broker as this has created lots of trouble on other websites with oter people advertising for their brokers aor even worse taken the p... out of them.
looking forward to your e mail

Kind regards

Ali,

Wow - what a great answer!

You are welcome to post the name of the broker you like for OTC options. I know there are a lot of folks using Saxo bank and IKON global for those but there are some others. I like OTC options and their exchange traded sisters but I go back and forth on which I like better. Right now with all the vol out there I am very much in favor of the exchange traded versions that seem to be maintaining a tighter spread. What are your thoughts?

Thanks John, I am humbled to have a compliment from you!

I am with Saxobank and am happy on their reliability and execution, the spreads are big,I totally agree with you, the spread and comissions can kill your account and I therefore aim not to enter and exit positions very frequently. only in 7-10 days if necessary.
Exchange traded options in my opinion however do not give me the flexibility in some other areas as well: I like to play around with deltas and gammas and adjust my position size regarding this.
To make this matter more complicated I don't only hedge with a spot position but sometimes also "delta" hedge a current options position with a diffent option of a different(shorter) expiry date, not quite to confuse with calendar spreads I guess,but the idea is in that direction.
More important is my aim in the hedge position to get out of it before expiration. Is a bit of a play and needs more regular monitoring of a position,but it's fun. However it is improtant to note that a current delta on a position is affecting my second position and so on...this all can be more beneficial in volatile markets like this and sometimes even necessary in my opinion, however,
So, if I do want to do this all,then for me flexible expiration and strike prices are improtant. I guess this really counts for me but again , It is a different game than what one can do on exchange traded options with the iron condors and butterflies wher a smaller spread is certainly more beneficial.

Thanks again
Ali