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Minyan Mailbag: What Prevents Short-Term Option Selling?

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...controlling and understanding risk is the key to long term success

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Prof. Succo,

This is Ravi from the Harvard Investment Association. I just wanted to say hello and thank you again for coming to speak to us. I had a great time hearing about some of the options strategies you guys use over dinner.

Along those lines, I've got a question for you. What prevents traders from selling a ton of extremely short-dated options (like selling Feb options that expire Friday)? Is it the case that there is not enough demand for these options? Which I could see making sense because the timeframe is so short.

Thanks

Minyan Ravi

MR,

Yes, it is part that. You must have a buyer willing to pay a price that warrants a seller selling so many.

But it is really about risk. Most traders, if they last long enough, learn that controlling and understanding risk is the key to long term success. There are opportunities all the time, but managing those opportunities and understanding that even good opportunities turning bad is a part of probability is essential. The trick is to not get blown out of the game so that the odds work over time. Odds are fickle: in the short run the odds don't need to play out, but in the long run the universe is built in such a way that they almost certainly will (the longer the period, the more certain).

This is why good traders don't punt and sell options more than would be appropriate if risk is controlled.

-Succo
No positions in stocks mentioned.

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