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June 20, 2005
Optionetics: Selling Covered Options on S&P 500 futures
[Monday morning link-fest: Bill Cara's weekend review, Carnival of the Capitalists at Blog Business World, Barry Ritholtz's Around the World.]
Optionetics has an article that looks at how S&P futures differ from commodity futures; and how covered option spreads on S&P 500 futures (bull/bear, call/put) can be used to add another dimension of diversification to a properly balanced trading plan.
S&P futures options offer the same benefits as other futures options, such as highly attractive margin requirements, the ability to sell far out of the money strikes and excellent liquidity.
Problem: Selling naked options on S&P futures only yields a tiny (comparatively) return on capital invested. Also, the trader takes the risk that even a mild fluctuation in the value of the S&P could increase margin requirements substantially.
Solution: Covered option spreads allow a trader to enjoy the benefits of collecting option premium while limiting risk and reducing margin requirements simultaneously.
The downside to spreading is that it takes time to reap the profit. To take the full profit, the investor must generally remain in the trade through expiration, or at least close to it.
Posted by galatime at June 20, 2005 11:25 AM
Thanks for mentioning my hosting of Carnival of the Capitalists. It's greatly appreciated.
Posted by: Wayne Hurlbert at June 21, 2005 06:25 AM
