Options  |  AUG 2005

The Cash Cow by Carley Garner with Paul Brittain

Stocks & Commodities V. 23:8 (24-27): The Cash Cow by Carley Garner with Paul Brittain Here’s a look at a side of short option trading that you cannot ignore. On the surface, selling options for the sole purpose of premium collection appears irrational. After all, the strategy involves unlimited risk and limited reward. However, a closer look into the reality of the options market reveals a side of short option trading that even cynics cannot ignore. EVER THOUGHT OF TRADING NAKED? Industry veteran Paul Brittain of the Commodity Trading School and Alaron Trading is convinced that short option trading is an effective futures trading strategy despite the negative hype surrounding it. Consequently, he is committed to educating traders about the realities of “trading naked,” and is eager to share some of his secrets. Option writing is the act of selling an option in order to collect a premium in exchange for assuming the risk of the market dropping below the strike price in case of a put, or climbing above the strike in case of a call. This is also referred to as “naked” option trading because the strategy involves theoretic unlimited losses. The logic behind option selling is similar to that used by insurance companies. Insurers collect premiums on policies with the expectation of future payouts. By knowing the probability of a claim, they can calculate their expected return for assuming the risk of the policyholder. They are confident that they will profit over time, despite their obligation to pay claims. Casinos successfully operate on a similar premise. They bring in gaming revenue knowing that there are jackpots to be paid, but they also know that the odds are ultimately in favor of the house.

by Carley Garner with Paul Brittain