The Sell/Write/Short an Option. This strategy has unlimited risk and carries margin requirements just like a futures contract. Margin requirements are calculated differently at different brokerage houses. Make sure before entering in this position you contact your broker to find out out margin requirements. As for unlimited risk, if the underlying futures contract goes beyond your strike price you are now accountable for a possible exercise of the option. The use of stops are necessary for this option strategy.
There are a couple of advantages to this strategy. First of all, you do not have to predict which way the market is going but choose where it is not. Options are wasting assets, meaning that options are comprised of time premium which disintegrates with each day. The longer the amount of time until expiration, the more value it should have.
Second, 90% of all options expire worthless. This means that only 10% of option buyers actually make money. The odds for option sellers or writers are in their favor. The key to selling options is to use market volatility to your advantage. The higher the volatility the higher the option premium. The best strike prices are usually 2-4 futures moves out of the money. the amount of time left until expiration should be somewhere in between 21 and 60 days. Anything longer, it takes larger underlying futures moves and less time premium wasting per day. Again as with other option strategies you need to use a very liquid market.
There are a couple of exit strategies, the best would be to collect between 50% and 70% of the option value and exit position.
