Dangers of Options Selling
Option selling might seem like a good way to earn recurrent profits but if used wrongly, will always cause more harm than good. Hence the reason why I do not recommend anyone to just blindly jump to selling right away. The risk of blowing the account is too real and if you ignore your pre determined rules, you are very likely to suffer the horrible consequence that follows. Below is just 1 of the examples which has strike my heart even to this day.
Those living in Singapore may or may not have heard of Alvin Chow of Big Fat Purse (http://www.bigfatpurse.com/). He posted an article on 29 Jan 2014 about how he ignored his rules and eventually blew a full year's salary selling options. His article could be found here: http://www.bigfatpurse.com/2014/01/how-i-blew-up-105000-in-my-trading-account/ .
In the post he mentioned the all too real risk of how greed and ego can undermine months of profits and eventually cost him a huge portion of his account. That is the reason you should print out your trading rules and paste it at a prominent place to remind us daily of the rules that we set to protect ourselves.
I always tell those who are interested in Option Selling that the risk is unlimited, but having unlimited risk just means you have to manage your own risk as the market is not going to do it for you. It is not the same as buying Options where you can only lose the premium you invested in. The only other person who will limit your risk by closing your position is the broker (by means of the dreaded margin call). Once he calls you, you know your account is in deep trouble.
Therefore, I have always tried to stick to my pre set rules to prevent any mishaps from occurring. That being said, I myself have received 1 margin call before when I just started out. But by the time I received the margin call, I had already bought back the losing position and my account was in the green. I called my broker and he told me that the margin call was not valid as I had already corrected the error of my accounts. Hence, it did not affect me. That episode taught me to keep a healthy portion of my account in cash in case of any mishaps and to close the losing position when it reaches my rules.
Always take calculated risk.
Always know what is the worse possible outcome if the trade does not go as expected.
Live to fight another day.
Disclaimer: This is not a recommendation to buy or sell any mentioned stocks or securities in this blog.