Safe, steady profits from Selling Options
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 four types of option selling:
- Credit Spreads (Bull Put Spread and Bear Call Spread);
- Naked Puts
- Iron Condors - a potentially really profitable way of selling combinations of credit spreads.
- 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?
The amazing thing about options trading is that they can be combined in a whole variety of ways, all with different opportunities for profit, and different risk profiles. Many brokers will allow you to sell these combinations as single trades, so your brokers commissions will not be appreciably higher (make sure you check what you broker charges!). In many cases, the key difference is the amount of margin you are required to put up, and how much risk the trade entails. Here are a couple of the more popular varieties:
- Iron Condor - essentially selling two credit spreads simultanaeously on the same stock. Low margin, but higher risk and higher profit potential. Great when it works, but expensive when it tanks! Best in non-trending markets.
- Calendar Spreads - also pretty good profit potential, and you need to know your trend. (TOP TIP: the 'Trading Pro System' video series, which you can read about here, deals with these two in amazing detail with lots of live trade examples.)
- Butterflies and Ratio Spreads - a bit more comples to understand, and require hefty margins.
So, Keep it Simple! And...
TOP TIP: the best way to learn options trading is to practise, practise, practise.... The Iron Condor 101 Trading Simulator is a fantastic way to do this. You make repeated trades using historical data, and learn how to manage, exit and adjust every trade until you get it right every time. The experience you gain will be equally valuable for selling both iron condors and credit spreads. Give it a try, with a full monay back guarantee.
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