Selling options

A) Potential risk in selling options
1. Selling option is more risky than buying option

- by virtue that the seller is at the mercy of being assigned to fulfill the contract when the buyer exercise his rights to buy or sell the stock. While buyer has the exercise right to buy or sell the stock, seller has no such right but is instead obliged to fulfill the contract (ie has no choice to walk away but can only accept the assigment).

2. Selling naked option
a. sell put option without putting up cash collateral is considered a naked transaction n exposed to unlimited risk (downside risk is limited from strike price to zero price). Assuming the seller has been assigned to buy 1 contract at the strike price of $100. Without sufficient capital of $10k ($100 x 100 stock per contract) set aside in the account, the broker may lend funds to the put seller to complete the purchase. As a result, the seller will incur cost of borrowing aka margin cost if the account is not funded in time.
b. Sell call option without owning the stock is also a naked transaction with unlimited risk. Assuming the seller of call has been assigned to sell the stock at the strike price of $100. If the seller does not hold the underlying stock to deliver to buyer, seller has to make good the contract by buying the stock at the current market price. If the stock has rocketed, the seller has to buy at the high market price n the loss can be immense (no limit to the upside).

B) Potential rewards in selling options
Selling option is income generating; the potential profit is capped at the premium collected.

C) For protection against the unlimited risks in selling options, do consider:

a. Sell a cash secured put option
- by ensuring there is sufficient capital to fund the purchase of underlying stock if assigned.
b. Sell a covered call option
- by already holding/owning the underlying stock so that there is available stock to deliver to buyer when assigned.

D) To profit from the wheel strategy,

a. price direction is critical to success.
If you think the price will go up, sell put option.
If you think price will move down, sell call option.
b.Set a consistent profit target of between 30% to 70%. This is just a personal guide, depends on your own preference n risk management.
c. close the position usually 3 to 7 days prior to expiry date unless the option is deep otm. This is just a personal guide, depends on your own preference n risk management.