Do Option Sellers Have a Trading Edge?

Options were created as a way to hedge a position. They were created to act as insurance. Options are used in trading the same way you use car insurance: They were first introduced in the commodities space.

Imagine you are a wheat farmer and you need to know what the price of wheat will be when your crop is ready to sell. As a farmer you could buy Put options on wheat as a hedge against falling prices. This way even if the price of wheat drops to zero and your crop is worthless, your Put options will make money and make up for the loss. Click Here To Download Your Watchlist Now. Toys are made of mostly plastic which is made from oil and gasoline.

In order for you to know your costs, you need to know what the oil and gasoline will cost in the future. If they go up too much your toys will cost too much to produce and no one will buy them.

So what you do is buy Call options on Oil and Gasoline. That way even if the prices go up, your options will make money and you can use that money to offset the higher cost of materials.

In both scenarios, you want to lose money on your options! You only wanted them as insurance. No one ever wants to collect on their insurance, because that means something bad happened.

Market makers and other traders are happy to sell these options because they know the odds are on their side and that the options will most likely expire worthless. They did so well in the commodity space that stock traders wanted to use them too. So options were then introduced on stocks in the hopes of increasing trading and commissions. Boy did that pay off for the stock exchanges.

And while it is possible to hit a home run with options once in a while, over the long term, buying options is a losing game. We are the insurance company because we sell insurance to folks who want to protect an equity position. Simon Says Options Layup Spread Options Trading. Why Do Most Options Expire Worthless?

The 15 Most Active Call & Put Options of the S&P Components - Slide 1 of 15

Options were created as a way to lose money! You probably already have several types of insurance: But what is worse than paying those premiums? Having to actually use the insurance.

Because that means something bad has happened. Prices fluctuate all the time. Or take the example of a toy manufacturer. Click Here To Download Your Watchlist Now Toys are made of mostly plastic which is made from oil and gasoline. So you see, both sides know that the options will expire. And they are happy with it. The odds are against the option buyer.

We find options that we think are going to expire and sell those.

Options Expiration - How to Manage Expiring Options Positions | InvestorPlace

This gives us high probability trades and very nice returns. You can look at us as either the insurance company or the casino. But mostly, we are the casino.

We let option buyers suckers , make long shot bets that have very little chance of paying off. So which would you rather be? The gambler option buyer or the house option seller? Because we all know… the house always wins. Join The Conversation Email Facebook. Our Service Pricing Getting Started Guide What Is A Layup Spread? Support Member Login Contact Us FAQ Jobs.

Legal Privacy Policy Terms of Service Earnings Disclaimer. Contact Us Spill The Beans Research, LLC SW Gemini Dr Beaverton, OR Past results do not guarantee future results. You can lose money trading options and the loss can be substantial. Losing trades can occur, have occurred in the past, and will occur in the future. Don't trade with money you can't afford to lose. Only risk capital should be invested since it is possible to lose all of your principal. You should read "Characteristics and Risks of Standardized Options" to further understand the risks of trading options.

We are not licensed financial planners, financial advisors, stock brokers, investment brokers, or investment advisors. Before making any trades, check with a financial planner, investment advisor, tax advisor, or anyone else that controls your finances to make sure option trading is right for you. The information provided on this site should not be construed as individual investment advice. All information presented on this site is the opinion of the author only and is not a solicitation to buy, sell, or hold any investment or security of any kind.

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Testimonials herein are unsolicited and received no compensation; certain accounts may have worse performance than that indicated.

Trading stocks, futures, options and spot currencies involves substantial risk and there is always the potential for loss.

Your trading results may vary. Because the risk factor is high in options trading, only genuine "risk" funds should be used in such trading. If you do not have the extra capital that you can afford to lose, you should not trade in the options market. No "safe" trading system has ever been devised, and no one can guarantee profits or freedom from loss. Government Required Disclaimer - Commodity Futures Trading Commission.

Forex, Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets.

No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this website. The past performance of any trading system or methodology is not necessarily indicative of future results.