They say trading options is complicated, and that most people who try will struggle or either fail.
Heck, I struggled and failed my first attempt at trading options too.
And you better believe it was frustrating.
After all, here I am, a consistently profitable momentum trader whose skills aren’t transferring over to options.
Maybe something like this has happened to you:
You see your ideal chart setup, a bullish one, and you think, if I buy calls here and the stock pops I should get paid out…
Then the expected moves happens, you get excited, go to your options position to pull up an order ticket to close out for a profit…
But it turns out that the position is in the red… and are actually down on the position.
It’s the kind of stuff that would happen to me that almost made me swear off options for good.
However, options weren’t the enemy… nor was there someone out to get me.
You see, when you buy a call or a put, it’s not enough to guess the right direction, you also need to get the timing and volatility right…if you want to make money as an options buyer.
And that’s why I wasn’t able to profit utilizing my stock trading skills.
However, all of that has changed now. My latest options strategy allows me to profit from all the factors that were killing me. I’m even getting much better returns on my trades.
The beauty behind being an option seller is that there are several outcomes that can occur and I’ll still get paid on them.
(My latest options strategy, Weekly Windfalls, should be bigger than anything I’ve ever accomplished with stocks. And if 19 for my 19 trades is any indication, then you’d be silly not to join me as Weekly Windfalls Founding Member)
But that’s just the tip of the iceberg when we’re talking about the differences between premium buyers and sellers. In fact, it stretches much deeper than that.
Now, selling options premium can be lucrative. However, there is a give and take with all good strategies. When you sell options premium, there are a lot of pros and just one weakness that I see (I’ve actually figured out a way to get rid of the cons with Weekly Windfalls).
For example, if you don’t already know, many of the options listed on exchanges expire worthless. Heck, there are some statistics that show more than 70% of options expire worthless.
If you’re a buyer of options and have been losing money… that might be the reason why. You see, if 70% of options expire worthless, and you’re long… the odds are stacked against you.
On the other hand, if you’re a seller of options… the odds are actually stacked in your favor.
Well, if you know how to sell options premium… more times than not, those options will expire worthless, and you’ll collect all the premium.
Time Decay Helps You
If you don’t know already, options have expiration dates. What that means is when you buy an options contract, there is a useful life… and over time, the options lose value due to time decay.
Those who buy options are at the mercy of time.
You see, if the option is out of the money, as each day passes… the options lose more and more value.
For example here’s a look at the options chain for Apple Inc. (AAPL).
If you look at the green rectangular column, you’ll notice theta. This is how sensitive an option’s price is to time. When you look at the $202.50 strike price, you’ll notice the theta for the calls (the left-hand side) is -0.11.
That means if you’re long 1 contract, those options would lose $11 in time premium (options have a multiplier of 100). That adds up. You see, as the options get closer and closer to the expiration date, the time decay actually accelerates.
Think if you’re a seller of options. You wouldn’t be at the mercy of time decay… and another person’s loss is your gain.
That means if you sell options with a short time to expiration… that time decay will accelerate as each day passes, and you can achieve big gains fast.
That said, time decay works in favor of options sellers… and works against option buyers.
Another pro of selling options is that you don’t have to be right on the stock direction.
Direction Doesn’t Affect You
Now, stocks either go up, down or trade sideways.
When you buy options (like buying a call or a put), you need the stock to move in your direction. Not only that, you need the volatility to go up too.
That said, you’ve only got a 50/50 chance here. Either the stock moves to your favor or it doesn’t.
But what about option sellers?
Well, let’s use an example. Let’s say you sell call options. As long as the stock does not go above the strike price plus the premium collected by the time the option expires… you’ll be profitable.
That means if the stock goes down… you make money… if the stock is choppy and just trades in a tight range … you make money… if it moves up a little (but not above the strike price)… you make money.
Conversely, the trader you sold those options (they’re long options) needs the stock to break above the strike price for them to be profitable.
Think about it like this… would you want to limit yourself and be right on the direction… or would you want to make money and not really care if you’re right on the direction?
I’ll take the latter any day.
That’s the beauty of selling options.
Now, there is one con of selling options.
Limiting Your Risk When You Sell Options
When you sell a call option… you risk is theoretically unlimited. A lot of people are actually against selling options because a number of things can go wrong.
For example, the stock could announce positive news, and those options can get in the money… then you would be on the hook for delivering those shares.
Similarly, when you sell put options, the risk you take can be big. Although it’s not unlimited like calls, if the stock drops significantly and gets below the strike price of the puts you sold… well, it could get dangerous.
Of course, these are all valid concerns.
To be honest, naked selling options is something I’m not comfortable doing.
However, the beauty of options is the fact that they allow me to be creative. That means if I want to sell premium, I can actually “buy an insurance policy” (also known as hedging my position) so that my risk is defined.
In other words, I can go to bed without having to worry whether my short premium position will be affected by a massive gap up or down.
As you can see, there are many pros to selling options premium… and if you know how to sell options premium the right way, you define your risk.
Now, if you’re interested in putting my newest options strategy to work – it’s got limited risk, high potential rewards, and you can “set it and forget it” – click here to take advantage of this incredible deal because the price will be going up very soon.