John Jagerson

Trading Where You Think Prices Won't Go

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Let's review the features of this trade:

1. You are opening the position by selling an option

You are the seller of the option, which means that you are being paid the premium when you open the trade. You will lose money if the market rises above your strike price,but will keep the entire premium if the market closes at expiration on or anywhere below the strike price.

2. Breakeven is equal to the strike price plus premium paid

The premium you are paid can offset some losses if the market rises near expiration. Your breakeven point at expiration is actually 145 pips above the strike price you sold (2.0145) because that is equal to the premium you were paid.

3. Time value works in your favor

This is an out-of-the-money option with no intrinsic value. The entire premium is made up of time value, which melts or reduces the closer you get to expiration and the more the market trends down.

4. Exiting the trade

You can exit this trade whenever you need to. If the market has fallen and the value of the call has declined to a desirable level, you can exit the trade by buying the call back for a cheaper price. You are then free to decide whether you want to sell another call for a larger premium. Alternatively, you can let the call expire when it has no value and keep the entire premium.