Option Selling & Unlimited Risk

Generally when we talk about Options and specifically Option Selling, lot of people discourage doing Option selling specially Call Options as it has Unlimited Risk also Put option selling as also considered to be very dangarous as market can open against you more then it can go up.

My questions is how the payoff Option Selling vs Futures ?

Can there be a possibility to loose more then the value of the contract by selling Put Option

For Example :
Lupin Spot : 871.65 Future : 874 Lot Size : 400
If I go Long Future @ 874 and Lupin goes bankrupt (Hope does not happen) Market opens at 0 then my Maximum Loss will be
(0-874)*400 = 349600 (Contract Value)

Can I loose more then 349600 by selling ATM 870 Put Option.

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Option selling is less risky compared to futures.

For Eg: Lupin CMP : 878
If you are selling Lupin 880PE @ 12
Say if Lupin opens at Zero next morning , your maximum loss in Option selling would be (880-12)
868 X 400 = 347200.
In case of fut 878*400 = 351200

Thanks Ram Mohan for the prompt reply. So in any case I can not loose then the contract value but what about Vega, If Volatility rises then would option become more expensive then future value.

My view is it can not but just wanted to double sure.


Hope this clarifies… :slight_smile:

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Vega only affects the Time value component of Option premium. Futures have nothing to do with Vega(Futures don’t have time value). Therefore, increase in volatility does make Option premium “expensive” but futures value would only change due to change in the underlying’s value(nothing to do with vega).


Thanks, this is useful

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Yes, Really appreciate . It really clarifies.

Price of options move as per delta, volatility and time.

Delta and moneyness of option correlation is as below:

ATM options have a delta of 0.5
ITM option have a delta of close to 1
OTM options have a delta less than 0.5
For futures, there is 1:1 movement with the underlying. Only for deep ITM options the option price movement is 1:1 with underlying. So, in this way, selling options is a bit less risky than selling futures.
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Thanks Smit, this is really helpful and clears all my doubt.

buying options your risk is limited till your premium you have already paid, nothing else
but selling option is a game of unlimited risk, more the price move against more loss increases till no limits

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Thanks Vijender, but its not different then buying and selling future and if you work with stop loss then you are still in the game. The problem will come when market gaps up and down against you and hit circuit limit without giving to cut your position.

Usually if the price goes against you then you can square off your position


safest is to be in option buying, where your risk is limited till the premium amount,
even in a 1000 points crash if you have bought @ 50 your risk is limited till 50 only
but it’s on your analysis to go for ce or pe,

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Thanks Vijender

But 90% of the options expire worthless and the only way to monetize this is to sell these options first.

brother i have not told to keep it for expiry,
and for loss option selling needs a good hedging strategy, else selling is a unlimited loss game
but no power can give you unlimited risk in buying with / with out hedging

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90% of OTM OPTIONS expire worthless & not 90% of all OPTIONS. But that doesn’t gives anyone a free run to go start writing OTMs . There are many strike price OTMs & usually the action happens on a daily basis & a couple of moves against an option writter may force him to book a loss & square off. At times, the previously OTMs becomes ATM then ITM.

As the OTM starts becoming ATM & then ITM,
I assume the options writter has already booked a loss because theoretically his liability is unlimited.

Its usually the option buyers which may hold on indefinitely till expiry even not caring if OTM expires worthless because many big institutions buy OPTIONS for hedging purposes.

But yes lots of retail traders are also getting trapped n enticed for buying OPTIONS.

I think all the OTM options will expire worthless not 90%. Am I missing something here.

Yes you are missing something.

Yes, all OTM options become worthless when they expire. But Spaceship did mention that some previously OTM options become ATM and then ITM, therefore these don’t end up worthless.

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Good article on option selling.