Opening My Own Personal Insurance Company

Inspired by my friend, Noob Selling Options , I started my own journey to sell options.

Selling options is like selling insurance and is very addictive, especially when you see the premium coming in almost instantly after the order goes through. It is like opening your own personal insurance company. 

Let's say company A is currently trading at $10 at 1st Dec and options trading is available. In the view that $10 is a fair value, the share price may either go up or down. Without any shares at hand, we may for example sell one put option at strike price of $9 with premium of $1 per share that expires on a specific date in the future, for example 11th Dec. (Note that premium varies from time to time)

What this mean in layman term is I am selling people a promise that if the share ever drop below $9 from the time I received the premium and before the expiry date, I will buy the share from them at $9 per share. For example if the share dropped to $8.5 tomorrow, the person that bought the put option from me can exercise his rights to the option and assign me his shares. (Every 1 option is equivalent to 100 shares)

Example of Company A's Price Action from 1st Dec to 31st Dec

So what's the catch for me? In the event that it is not assigned, I get to earn $100 premium from it (100 share x $1 premium per share. In the event that the share dipped below $9 and I am assigned shares for it, I can either sell any price between $8.1 to $9 and still get a slight profit from it or I can turn and sell call option for it. Example, I can sell at call back at $10 with a premium of $1 per share.

A call option is me selling people a promise that if the share ever goes above $10 from the time I received the premium and before the expiry date, I will sell my shares to them at $10 per share.

Is there any risk to selling options? Of course there is, people will tell you there is limited gain and unlimited losses. However, risk can be managed. 

Do not sell naked options. Do not sell put option when you do not have the money to pay for it. Do not sell call option when you do have have the shares for it. 

Capital: Around 22k USD

Collected premium: 1177.47 USD (5.39% return from data till date)

Realised profit (From options): 258.78 USD (1.18% return for 2021 from data till date)

Disclaimer: Shared opinion on this blog is not to be treated as investment advice to the readers. Please do your own due diligence and consider your financial goals before investing.