Never Ever Sell An Option

During his recent interview on The Acquirers Podcast with Tobias, William L Silber, author of The Power of Nothing To Lose discussed Never Ever Sell An Option. Here’s an excerpt from the interview:

William: Yeah, so that you had a bunch of questions in there and I don’t know which one I’m going to tackle first. Let me tackle the one about selling options. I traded options on the futures exchanges. I was on the New York Mercantile Exchange. I traded crude oil options. I also traded futures contracts. I was actually on the floor of the exchanges when it was fun to be on the floor and you could make money. I don’t know whether you ever saw Trading Places with Eddie Murphy?

Tobias: I’ve seen the movie.

William: It’s the best movie there. It’s the best movie and that’s what I did. It was a lot of fun. The last thing you wanted to do was sell naked calls. Naked meaning not protected or sell out of the money calls. You keep on making money 90% of the time. Why? Options expire. Most of the time options expire worthless. But the 10% of the time that they pay off, they will carry you out bankrupt. So, I used to tell my class, if there’s one thing you learn– actually, two things you learn. First, downside protection. The second thing is never ever sell an option. You will make money most of the time, but you will not live to tell that story, because you won’t–

Now, do we hear stories about people making money selling options? Of course, we do. That’s because of a phenomenon known as selection bias. We only hear the stories of the people who make money. We don’t hear the stories of the people who went bankrupt slowly. People who went bankrupt a lot like Hwang and Archegos, the big losers we hear. But the slow losers, which is most people who do this kind of thing and they just fall by the wayside. So, to come back around, I don’t think selling options is a good strategy unless you are well hedged, because for every buyer of an option, there’s a seller. Somebody’s selling, but they are not selling naked options if they live to tell it.

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