What is an Option?
First let's look at exactly what an currency option is:
A contract is between a buyer and a seller and gives the buyer the right (but not the obligation) to buy or sell the underlying currency at a specified price on an agreed upon date in the future. You can buy two types of option which are call options and put options.
The buyer of a call option has the right to buy the underlying currency at an agreed upon price at a future date. A put option provides the buyer the right to sell the underlying currency. The option buyer in theory has unlimited profit potential and limited risk but the odds are stacked against him and while the option seller has unlimited risk and a limited gain, he has the odds of success on his side.
Sell Options with Odds of 80% on your Side
Of course while you can buy options you can also sell them and there are rules for doing both to increase your odds of success and the rules for selling and making money are the opposite of what you should do when you buy.
In other articles we have looked at how to buy options and make money and the two golden rules you have to remember are:
Buy at or in the money options
Buy time and make sure you have at least a few months on your side.
If you are selling options the reverse is true – you want to sell out the money options and options with limited time to expiry so time decay kills them.
Selling Option Premium for Profit
If you are selling options you should have a well capitalized account to ride out short term price spikes against you, you should also diversify across a number of options.
The best way to sell options is to sell into short term price spikes which are generated by greed or fear. When the herd think that the market will go on for ever and a price spike is occurring buying options becomes expensive and you can collect plenty of premium, selling out the money options above these prices spikes.
If you want to sell options correctly, you need to have a good understanding of standard deviation of price and volatility, because if you are selling into greed or fear, the danger is the price spike will run on and eat into the equity of your account.
Should You Sell Options?
Selling currency option premium should only be done by well capitalized and experienced traders but if you do have the money and you are confident in your system, you can make great currency profits with an 80% chance of the option expiring worthless and collect a lot of premium to boost your account equity