Hi Sir,

Have been a regular reader of your columns and articles on the net. Of late, I have started facing problem while writing
calls on index due to higly fluctuating index. Although I start a bit early (typically writing next month calls) and
covering the downside by suitable position in futures, but the futures' down side is hitting hard.

Would like your opinion on writing index calls but spreading the strike prices.

best regards,

Aditya



Hello Aditya,

You have an excellent idea. It's far less risky to spread one option against another, rather than using futures to hedge an option position. I
also like the idea of selling options before they become the near-term. As part of thta method, I try to close the position well before expiration
arrives.

I believe you will find that selling call spreads (or put spreads) to be a viable strategy. The obvious major advantage is that losses are
limited. But margin requirements are also significantly reduced.

When trading for my own account, I sell index iron condors. Those are spreads in which the investor sells an equal number of call and put spreads.
Obviously your bias is towards selling only call spreads, and there's nothing wrong with that. I suggest you choose an appropriate option to sell.
That part should be easy for you. Next, choose a same-month option to buy. I always buy the option with the nearest (further out of the money)
strike, but you may prefer to choose an option that is further OTM. Obviously, the further apart the strikes, the greater your reward potential - and the
greater your risk (and margin requirement).

Bottom line. I know you will be much safer buying a call option, instead of futures, to hedge each option sold. The profit potential may
not look as attractive, but when you buy this type of insurance for your portfolio, you must pay something for that protection.

Best,

Mark






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Mark D. Wolfinger
Create Your Own Hedge Fund: Increase Profits and Reduce Risk with ETFs & Options