In the current situation, inflation exists in the economy, this apparent problem actually provides interesting option trading opportunities. This strategy aims at eliminating the frequency for timing the market, thus minimize traders' exposure to potential losses. A trader who is sensitive enough to avoid high risk is concerned with their chances to suffer loss.
A few Call Options gives the trader the right to purchase, but the existence of limited risk still indicate his great exposure to potential loss. Once the price does not get up to the expectation, traders would lose all of the money that they put up to buy the options. In this situation traders would choose Option Selling, in that he or she is obliged to abide by contract. In currency exchange the idea is the same, but here metal trading is used as an example If a person sells a $1000 Gold Call in November and receive money, he or she actually agreed to deliver to the Option buyer $1000 Gold between now and till November. If you are the seller for this option, your maximum profit is the premium, but the risk is unlimited. If Gold can be traded at $1100 an ounce in November, you have not changed your decision, you have the obligation to make delivery of the metal to the Option buyer at the initial amount of $1000 an ounce. If this happens you suffer a loss of $100 per ounce on every selling contract. When each Gold contract has 100 ounces, the loss is huge.
There is one thing you can do: spread it off! Be in the option and also against option. If a trader bought in February a $400 call Option of Gold for a premium of $6.00 an ounce. Since each Gold contract accounts for 100 ounces, this trader needs to pay $600 per option. The risk is restricted to $600. Furthermore, if this trader now sold the November $1000 Gold Call Option, it has an earlier expiration date, and collected a premium of lower amount of money, then the initial risk is minimized to the difference between the premium of $600 being paid and the lesser amount of money he collected.
What this method has said, traders opined that Gold will move after November but before February. Once this expected disruption occur, within the time frame stated, a trader is heading for the right direction. This strategy is also extremely useful in the trades of historical lows. In addition, the closer a trader gets to an option expiration, the more information he or she can gather regarding the effectiveness of the method. The rule of thumb is players should play the game without exposing himself to too many downsides. This is very true to any types of high leverage transaction.
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