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Saturday, March 20, 2010
Weekend Quote from a Book - Options Selling
An insurance company tries to weed out drivers that it deems to be prone to accidents. Some of these may get insured at higher premiums (to account for the higher risk the insurance company is taking on them), and some may not get insured at all.

Your job as an option seller is to go through this exact same process. Just as most drivers do not have accidents, most of your options will never go in the money. However, as in insurance, a few bad accidents can be bad for the bottom line. An insurance company, therefore, tries to reduce the chances that one of its drivers will have an accident by checking factors such as driving record, age of the driver, type of car, etc. As an option seller, you will go through this exact same process except instead of drivers, you will be studying a market's “driving record”, historical tendencies, current and future fundamentals, etc. While an insurance company can in no way guarantee that the drivers it selects will not have accidents, it certainly can help its business by selecting only drivers who have what it considers a low chance of being in an accident. Thus it can lower its risk and increase its profitability. You can too.

- Source: The Complete Guide to Option Selling, Second Edition

by James Cordier & Michael Gross

Note: I am an affiliate. Please also see Disclosures and Disclaimer

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posted by Little Rishi @ Saturday, March 20, 2010  
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