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Selling options is often overlooked, because it is not as hugely profitable as buying options. Regular, steady profits of 5-20% per month are easily achievable, with minimal risk and not a lot of trading effort. For someone hoping for 50-100% profit per month, this is small change; for someone who simply tracks the S&P, this is HUGE profit. Do the math on a spreadsheet - you can start with $1,000 and grow it to one million dollars in just over 4 years if you average 15% profit per month.
These are my favourite option trading strategies, for exactly these reasons - it is not stressful, it is easy for a beginner to start up with small capital, it is safe, and it leads to really good, steady profit - and you get to sleep well at night. Best of all, this method of trading options gives you the highest probability of winning.
Think about it. A popularly broadcast figure states that 90% of option buyers lose. This means that 90% of option SELLERS are winning!
When selling options, you have one key factor on your side: TIME DECAY!
A second key factor: Selling options is not dependent on picking the direction correctly, whereas when you are buying options, the direction is fundamental to the trade's success. It does help to get the direction correct, but you still have an 80% or better chance of winning even if you are wrong on direction.
On this site, I will focus on three types of option selling:
- Credit Spreads (Bull Put Spread and Bear Call Spread);
- Naked Puts
- Covered Calls
These three strategies are relatively cheap (in terms of Brokers' fees), simple to execute and simple to understand. All they need is an initial directional call. You need to know the trend of the general market and of your chosen stock. That's it!
What about other combinations?
I choose to stay away from combinations such as Iron Condors, Butterflies, Ratio Spreads and Calendar spreads. I also find strangles and straddles equally unhelpful. Why?
Iron Condors, Strangles and Straddles are all dependent on the market going nowhere, or moving sideways. If there is any trend or momentum in the market or in the stock, one or other of the legs of these strategies gets burnt out. Iron Condors are like Credit Spreads, but they are effectively four trades instead of two (as with Credit Spreads), and so broker fees are in effect doubled.
Butterflies involve lots of simultaneous trades, and these cost a lot in broker fees. Remember, options are MUCH more expensive to trade than stocks!
Ratio Spreads require pretty hefty margins, and calendar spreads involve too much time.
So....
Keep it Simple! And...
Sell Options....
Return from Option Selling to the Home Page
Move on read about the first three ways of selling options: Credit Spreads
Or: Review information on finding a trend
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