Most options expire worthless and out of the money, therefore most people lose when buying options. Hythe Securities Limited believes there is still opportunity in buying options, but you must be very patient and selective. We believe buying options just because a market is extremely high or low, known as “fishing for options” is a big mistake. Refer to the guidelines on our “Trading Commandments” before purchasing any options. Historic volatility, technical analysis, the trend and all other significant factors should all be analyzed to increase your probability of profit. All full-service accounts will receive these studies, opinions and recommendations upon request. Hythe Securities Limited’s “Trading Commandments” can be used as a guideline to assist you in the process and decision making of selecting the right market and options to purchase.

A common strategy we implement involves the writing and buying of options at the same time, known as bull call or bear put spreads. Ratio and calendar spreads are also used and are recommended at times. Please do not hesitate to call for help with any of these strategies or explanations. Here are a few examples we use often:

1) If coffee is trading at 84, we can buy 1 coffee 100 call and write 2 135 calls with the same expiration dates and 30 days of time until expiration. This would be in anticipation of coffee trending higher, but not above 135 in 30 days. We’d be collecting the same amount of premium as we’re buying, so even if coffee continued lower we’d lose nothing. Our highest profit would be attained at 135 based on options expiration. To determine risk we’d take the difference between 135 and 100, which is 35 points and divide it by two, because we sold two calls for every one purchased. You’d then add the 17.5 points to 135 and this would give you the approximate break-even point based on option expiration. Risk lies if coffee rises dramatically or settles over 152.50, based on expiration.

2) A typical calendar spread strategy we use often would be to write 1 option with about 25 days left until expiration and buy 1 with 60 days left. Example: If coffee was trading at 84 and we thought prices might be heading slowly higher. We can write 1 130 coffee call with less time and buy 1 coffee 130 call with more time in the anticipation that the market will trend higher, but not above the 130 strike before the first options expiration. Some additional risk here lies in the difference between the two contract months. The objective is, if coffee trades higher over the next month but not above the 130 strike price, we’d collect the premium of the option we sold by letting it expire worthless. In addition, the option we purchased may also profit if coffee rises higher, but it may lose some value due to time decay if coffee doesn’t rally enough.

*Note: Some options trade based on different futures contract months and should always be considered in your trading. Don’t hesitate to call for help with any of these strategies or explanations. Remember, the key is still going to be picking the general market direction correct. Therefore, you must analyze and study each market situation with several different trading scenarios and determine which one best suits your risk parameters.