Making sense of writing options (newb)

S

sosomo

Hey,

I'm trying out options, FX options. And from "text-book" examples when selling (writing) options, you are supposed to get a premium and if market moves against you, you lose that amount.

Here is what happened in my test trades with **** global markets (not binary, it was vanilla options).

I SOLD a 1M EURUSD Call @ 1.277 for a 1,500 USD premium. (This was at the exact time when spot was at 1.277 and I sold for that strike).

So I got the 1,500 USD premium, but at the same my option had a negative value of 2,500, so I was net in a 1,000 USD loss.

When spot price moved to 1.279 (20 pips against me) I was in a net 2,000 USD loss.

So my question is: does this make sense, and is it supposed to be like this or is the broker making too much money somehow for himself?

I keep thinking that I'm exposed to whatever volatility will come out until expiration, because I sold the option, so I don't have any limited risk. And the PNL and margin requirements reflect exactly those of a spot position. So what is the benefit here with writing this option?

There was no hedge in place or anything.

Appreciate any guidance before I go crazy or lose to much money...
 
ShortCallGraph.jpg


Short Call Risk (if naked) = Unlimited Loss (potentially)
 
Quote from sosomo:

Hey,

I'm trying out options, FX options. And from "text-book" examples when selling (writing) options, you are supposed to get a premium and if market moves against you, you lose that amount.

Here is what happened in my test trades with **** global markets (not binary, it was vanilla options).

I SOLD a 1M EURUSD Call @ 1.277 for a 1,500 USD premium. (This was at the exact time when spot was at 1.277 and I sold for that strike).

So I got the 1,500 USD premium, but at the same my option had a negative value of 2,500, so I was net in a 1,000 USD loss.

When spot price moved to 1.279 (20 pips against me) I was in a net 2,000 USD loss.

So my question is: does this make sense, and is it supposed to be like this or is the broker making too much money somehow for himself?

I keep thinking that I'm exposed to whatever volatility will come out until expiration, because I sold the option, so I don't have any limited risk. And the PNL and margin requirements reflect exactly those of a spot position. So what is the benefit here with writing this option?

There was no hedge in place or anything.

Appreciate any guidance before I go crazy or lose to much money...
More...

Some points to consider:
* "...and if market moves against you, you lose that amount." - OR MORE! (By selling an option you now have an obligation, not a right, so your theoretical loss is unlimited.
* If your option had a 'negative value' of 2,500 you should have received that 'value' (premium) - Not taking into account the bid/offer spread here.
* Under 'normal' circumstances, an at-the-money option has a delta of 0.5. This basically means that you should expect to make / lose around half the amount you would have made / lost if you had held the underlying. (Deep in the money options have a delta close to 1 while far out of the money options have a delta closer to 0)
* Volatility (as measured by Vega) is only one part of the equation, but many other factors (measured by different Greeks) as well as of course the movement of the underlying will affect the outcome of your position.

I suggest you educate yourself a bit further before taking actual (real money) positions.

Hope this helps
 
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