Table of Contents
Option Buyer or Seller ? What makes things work?
Why would a trader elect to take the risk the money on buying options or selling options for premiums.
The main Greeks that work against Option buyer is Theta / Time Decay.
Next comes with owning negative-Gamma positions. For the option owner to earn a profit, the underlying stock must move in three ways.
Move in the right direction (up for calls, down for puts)
Move quickly to prevent the loss of too much money to Theta (time decay)
Move far enough to overcome the cost of buying the option
That is a lot of movement and most traders have a difficult time predicting market direction without a time limit.
Most traders prefer the option selling as it has a reasonable chance to earn money and makes even negative gamma positions attractive. Theta is your friend in Option selling.
Note: If selling options sounds good, be very careful. Markets sometimes undergo unexpected price changes, and the option seller can get hurt. It is advisable to sell a spread, rather than a naked option.
When we are trading negative Gamma positions then we need to use a risk graph like from opstra defineedge for us to know when we are in danger of losing too much money or when the position has moved beyond your comfort zone.
The Greeks — Gamma, Theta, and Delta — can help you estimate the price that will sound the alarm, helping you to reduce risk and gain profits.