Consider Becoming a Seller of Stock Options

Many investors are drawn to stock options as a possible route to quick and easy money. Smart investors understand money is neither quick nor easy. Droves of retail traders swing for the fences by buying significantly out of the money options looking for that grand slam. Inevitably, dreams of riches soon turn into the stark reality of a worthless expiration. A vast majority of all options expire worthless. All but a scintilla of far out of the money options have any value at all upon their expiration date.

If the dreamers who buy these options are inevitable losers, then what lesson is to be learned? The obvious conclusion is to be the one selling these options. In a casino you can not elect to switch places with the dealer. If so, they would all quickly go out of business. However, the options market allows you to assume either side of the trade. You can elect to be either the buyer or the seller. The large preponderance of retail options traders are strictly buyers. Consequently, the majority are also net losers.

Let time decay be your friend instead of fighting it. Think about all the times you have owned options with an expiration date bearing down. Inevitably the calendar runs out of days. Sometimes, to throw salt on the wound, the stock moves your way a day or two after expiration. Imagine all those instances representing winners as opposed to the losers they were. Maybe it is time to switch places and become the party who is happy with the inescapable passing of time.

Being a seller of options obviously entails risk. This is especially so for sellers of calls who take on theoretically unlimited risk. However, that is if the calls are sold naked. By selling spreads you can limit and define exactly how much risk you are willing to assume. Some instances warrant selling both a call spread and a put spread. Options traders will know this trade is referred to as an iron condor, and it presents a way to appreciably decrease your aggregate margin requirements.

There are many strategies to identify the most attractive spreads to sell. Many seek to focus on underlying stocks which have huge retail trading popularity. Exuberant novice traders will often bid up the out of the money options on the vogue stock of the day. Use Black Scholes as a yardstick. Contracts which price significantly above the established models are ripe for selling.

Pay attention to the expected future news flow for the underlying stock. Events like earnings announcements can provide impetus for accelerated movement. When selling options you must take this into consideration. Many sellers of options avoid picking expiration dates which are subsequent to the next stated earnings release date.

You will not make a killing on the sale of any spread. They yield a defined profit should they expire worthless and can yield no more. Many seek to make a fortune by hitting a grand slam through purchasing out of the money options. You should consider being the one who consistently hits singles via being the one to sell those veritable lottery tickets.