The Time Lock
As an enthusiast for option selling, whether for speculative trading or stock hedging, I'm almost always the seller. It's not that I have any bias against being the buyer; it's just that I prefer the unique advantage that comes with being the seller: time.
Think of it this way: I see the option seller as holding the key to time, capable of locking in profits or losses. As long as the contract held expires worthless, the time lock opens, offering patient individuals a generous reward—a gift from time.
Mastering this time lock can help navigate the ever-changing market with greater stability and longevity. I believe this is the pursuit of every investor. Here are some insights into how to wield this time lock effectively: ![]()
1. Big Lock to Small – Repeated Income
I'm talking about continuous covered call operations, especially useful when stocks are stuck. By continuously selling out-of-the-money call options, one can regularly collect premiums, effectively lowering the cost basis.
I call high-strike calls with higher premium collection "big locks" and low-strike calls with lower premiums "small locks." Big locks have a higher probability of exercise, while small locks have a lower probability. Through this exchange, gradually accumulating small gains can lead to significant cost reduction.
Some may wonder what happens if the exercise price is lower than the cost price, and the received premiums can't cover the loss. ![]()
Here's how I see it:
Market Environment:
Given the current bearishness in the Hong Kong stock market, it's not easy for stocks to take off abruptly. As long as you're a bit more patient, there'll always be opportunities to get your stocks back. Just a little more patience, and you might get a bounce, a surge, or even a breakthrough. As the saying goes, if you're willing to endure hardship, there's endless suffering to endure. The hardships of trading Hong Kong and Chinese stocks, only those who do it know it. ![]()
Exercise Probability:
Also known as the depth of out-of-the-money, determines the likelihood of exercise and the amount of premium collection. I use the Delta indicator as a guide—it represents how much the option's price changes for every one-point move in the stock price. Essentially, it reflects the probability of exercise.
I typically choose contracts with Deltas between 0.2 and 0.3, where the premiums collected and the probability of exercise are both moderate. For instance, through repeated covered call options on $KraneShares CSI China Internet ETF(KWEB.US$ , I've managed to lower the cost from 31 to around 28.5, finally inching down from the peak.
Pressure and Resistance Levels:
Reference technical indicators to draw the price fluctuation channels. You can confidently sell at the upper channel, raising the Delta, while selling cautiously or refraining from selling at the lower channel.
Calm Acceptance:
Using this strategy for a while, seeing options getting exercised is just a matter of time. As long as we've managed to reduce the cost through repeated premiums before exercise, there's not much regret, is there?
Of course, before options are fully exercised, there are remedial measures. That's what I'm going to discuss next—extending the lock.
2. Extending the Lock – Rolling
Rolling involves buying back expiring contracts and selling new contracts for the next period, effectively extending the contract's duration to avoid exercise. If luck is on your side, the contract will return to out-of-the-money, and no exercise will occur.
Moreover, as long as the option isn't too deep in the money, you'll still receive some time value with each roll, which is an additional pleasant surprise. Therefore, the option seller's tolerance for error is actually quite high. Of course, if the option is significantly in the money, there's no time value left, and rolling further would be pointless. In such cases, it's time to cut losses and move on.
This strategy essentially passes on risk to the future, although it doesn't eliminate the risk of a sharp decline in the stock price. For maximum insurance, besides buying single-leg put options, there's the strategy I'll discuss next—the collar strategy.
3. Locking in Time – The Collar Strategy
That's right—locking in time, locking in position, and calmly weathering the passage of time, regardless of whether the stock price rises or falls. Specifically, it involves using the premiums received from previous covered calls to buy out-of-the-money put options, protecting the underlying stock.
This operation is an extremely conservative bullish strategy, with very low construction costs. Its main purpose is to capture a small portion of the stock's rise while avoiding significant losses in the event of a major downturn.
I really like this strategy, although I don't use it much. Mainly because, before being repeatedly beaten down by the Hong Kong stock market, I was inexplicably confident about the stock price trend. The thought of buying put options right after receiving a little interest still pains me. However, with $TENCENT(00700.HK$ dropping below 300 recently, now it's not just a pain in the heart but also in the pocket. If you really want to protect your position, this is a strategy worth mastering.
The road to investment is long and lonely, but patience and diligence will eventually be rewarded by the market.
Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only.
Read more
Comment
Sign in to post a comment
