31 July 2013

Option Writing - treat with caution

Buying shares and writing options against them may appear to offer an escape from meagre yields in bond and money markets but investors should be careful. This strategy and those involving implicit options (like reverse convertible bonds) should not be used in a mechanical fashion without any attention to the market direction. There is a time for selling volatility and there is a time when it should be avoided. Selling any option always carries the risk of major loss should the investor misjudge the overall price trend of the underlying instrument.