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Five habits of successful Options writers

Options writing is primarily a game of seizing opportunities, managing losses, discipline, vigilance, and last but not the least, self-control.

January 15, 2023 / 12:26 PM IST

They say two in three Options created expire worthless. That means, over a period of time, any Option writing (selling) strategy would be successful 66 percent (or 2/3rd) of the time. However, that’s not what it takes to be a profitable Options writer.

An Options writer has a negative risk profile. It means a writer can (theoretically) make unlimited losses, while profits are limited (up to the premium received).

In the course of a couple of decades, I have met many Options writers, and only a few of them have been consistently profitable. Naturally, I have found a few similarities between them. I believe there are about five simple yet highly effective habits that could make any Options writer profitable. These are:

#1 Manage loss

Options writing is primarily a game of loss management. The reason being that the maximum possible profit is ascertained at the time of writing, which is your premium. Different writers have different techniques for managing losses. Some go by the simple stop loss mechanism. Some keep locking in smaller profits. For example, if I have sold an Option at Rs 10 and it comes to Rs 6, I will keep the stop loss at Rs 8. If it falls to Rs 4, I will move the stop loss to Rs 6.

Whatever your style, a profitable Options writer is always on top of his position, monitoring it at all times.

#2 Limit loss

Most of the disasters in Options writing have happened because of neglecting the following fact:

“Little possibility of a very big loss.”

I have seen most profitable writers appreciate this and follow a simple rule. They are always buyers of those ridiculously low-premium Options against the Options they’ve sold. This is just to make sure that one remains solvent in case all hell breaks loose.

Example: the underlying stock is at Rs. 1,000. You’ve sold a Rs 1,050 Call, yet bought a cheap Rs 1,200 Call, just in case the market makes any extreme moves.

#3 Opportunity driven

Time is an Options writer’s best friend. More time means more premium, as the underlying stock will have more time to move. When I started out, I used to write Options on first day of expiry.

However, it is best to write Options when they make you the most money. Profitable Options writers are thus opportunity driven, and not calendar driven.

One technique that many writers follow is to write Options towards the end of the expiry, where the time-value related reduction in premium is very high.

#4 Watch all factors

Profitable Option writers are vigilant. You may or may not bet on corporate results, monetary policy, etc.. You may or may not bet on big breakouts or breakdowns. But, one must be watchful of these factors while Writing options.

Writing Options right ahead of a known event or at a price point where things could explode in either direction is the must-avoid trade set-up for any Options writer.

#5 Control yourself

Last but not the least, a profitable Options writer will never go overboard. Position sizing is an individual thing and there is no one right answer that suits all. But, a profitable Options writer will always be slightly conservative in his positions. He would leave room for further optimising any opportunity. On the other hand, if things were to go south, there would still be money left for firefighting.

These are a few traits that can help one graduate into a more consistent and eventually a profitable Options writer.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.

Shubham Agarwal
Shubham Agarwal is a CEO & Head of Research at Quantsapp Pvt. Ltd. He has been into many major kinds of market research and has been a programmer himself in Tens of programming languages. Earlier to the current position, Shubham has served for Motilal Oswal as Head of Quantitative, Technical & Derivatives Research and as a Technical Analyst at JM Financial.
first published: Jan 15, 2023 12:26 pm