options
Pennies before a steamroller
The rule
Selling options collects small, steady premiums that feel like income. Then one rare, violent move takes back years of them at once.
Where it flips
But selling options is not always a trap. Done with capped, known risk and honest sizing, it is a fair position. The trap is mistaking a run of quiet premiums for safety, and treating the missing disaster as proof it will never come.
The option seller is paid a little each time to carry someone else's risk of a big move. Most months the big move does not come. So the premiums pile up and it looks like a salary. The trouble is the shape of the payoff. Many small wins hide one huge loss. A reader who has been collecting for a year may never have seen the day the position was built to punish.
A worked example
A reader sells index options every week and books a small premium for months, calling it a monthly income plan. A single sharp gap move on expiry day gives a loss larger than the whole year of premiums put together. [illustrative]
How to spot it
- ·premium income described as steady or monthly
- ·a payoff with many small gains and one loss with no cap
- ·no memory of the position's worst day in history
Nassim Nicholas Taleb · Fooled by Randomness