i just started learning options recently from varsity and have a basic question. i see that near expiry, a far otm call has a low delta like 0.02 and even gamma is low 0.0001 to 0.0003. thus the premium relative to spot doesn’t change much because of low delta and delta doesn’t change much because gamma which i read is the second derivative of premium is also low. my question is: if i sell a far otm call 2-3 days before expiry, i get a premium for cheap, and since premium erodes due to time decay, the win probability shows 90%+ in sensibull for that contract. then why doesn’t everyone do this?
from my observation (though only 2 weeks of watching - very low experience and low sample), what other factors can cause a premium spike of say 500-800+ spot in those last few days, making the premium rise despite time decay, low delta, and gamma? i think a gap-up opening due to dow jones dependency could do it, so holding overnight would be dangerous, but apart from that, what other factors should i focus on to prove my theory wrong? what am i missing?
Only thing is nothing comes free in market. if you are winning 9 out of 10 times with this strategy, 1 big loss eats away all the profits. sometimes much more.
Naked option selling is a big pocket game which requires firefighting and ability to manage adverse positions.
thanks @vikramaditya. for the point on 1/10 losing, buying a very deep call otm (every above the sold call otm) might provide some tiny hedge in case a black swan event which might force the premium to move up. other than that i am scratching my head as to where this might go wrong. though my experience is very very less like weeks in options only, inputs from experts like you guys is really helpful.
Profit is tiny. Jst calculate no.of lots to sell for say 4-5L per annum return n capital needed for.it … mutual fund will give same returns or gold or etfs
this is really a good point. i will need so much more margin if i increase the lot size for selling a call, just for some premium which is not worth it. thanks varun. but it becomes so much easy for rich people. no doubt rich become richer.