To The Moon

Many beginners see options mainly as a way to speculate on short-term price moves. But buying calls or puts involves more than getting the direction right: time decay and changes in volatility can also affect returns.

Selling options offers another approach. Some investors use it alongside stock holdings to collect premiums and plan potential share purchases or sales. It can complement a long-term portfolio, provided the obligations and risks are understood.

The “Insurance Business” Analogy

An insurer collects premiums in exchange for accepting risk. Option sellers make a similar trade-off: they receive a premium upfront and take on an obligation to buy or sell the underlying asset if assigned.

Time decay can work in the seller’s favour. If an option expires worthless, the seller keeps the premium without further obligation under that contract. However, adverse price moves can cause losses far greater than the premium received.

Assignment can happen in ordinary markets—not just during extreme events. A high win rate does not guarantee a profitable strategy.

Two Common Strategies Backed by Cash or Shares

Cash-Secured Put: Plan a Potential Share Purchase

Interested in buying a stock at a chosen price? A cash-secured put involves selling a put and setting aside enough cash to buy the shares if assigned.

The premium reduces your effective acquisition cost if you take delivery. If the option expires unexercised, you retain the premium—but may miss out if the stock rises.

The trade-off: You may have to buy at the strike even if the market price falls much lower. Choose a price and position size you would be comfortable holding through a downturn.

Covered Call: Collect a Premium on Shares You Own

A covered call involves selling a call against existing shares. It may fit an investor who expects limited near-term upside and is willing to sell at the chosen strike.

You receive a premium, but your shares may be called away if assigned.

The trade-off: You give up upside above the strike while retaining the shares’ downside risk. The premium offers only a limited cushion if the stock falls.

Put Risk Management Before Premium Income

Cash-secured puts and covered calls are backed by assets that help meet their obligations. However, both can still incur substantial losses and are not suitable for every investor.

Before trading:

• Check your commitment: Hold enough cash or shares to meet the full contract obligation.

• Assess pricing and events: Consider implied volatility and upcoming announcements. Higher premiums often reflect greater risk.

• Control position size: Avoid concentrating too much exposure in one stock or sector.

• Plan for assignment: American-style options can be assigned before expiry.

Build Your Knowledge, Step by Step

Selling an option is straightforward; managing the position takes preparation.

Explore Tiger’s options education resources to understand strategy mechanics, work through market examples and build your risk-management skills. Start with the basics and learn what can happen before, at and after expiry.

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