Create Higher Return on Options
Sell volatility: Fade the news
It’s no secret to most option sellers that higher volatility means higher premiums. How do you get more option premium?
Traders fear Volatile markets. It makes them uncertain that they will make money. Therefore the price of the option goes up. This situation creates more opportunities for the option sellers.
I do not suggest you should sell in front of runaway, breakout moves. However, a spike in volatility often creates ridiculous strike prices. These spikes are often temporarily. An Option Seller could take advantage of it. And collect more option premium when they sell options. Investors tend to get carried away or lose their heads in the excitement of fast-moving markets. As an option seller, you can use these situations to your great advantage.
Best time to receive more option premium
Shortly following a spike in volatility often can be a great time to sell options. A good example is after a surprise government report. An unexpected report comes out, and prices of the commodity in question must adjust to reflect the new numbers. This often plays out quickly — over a period of one to three trading sessions. After that, the market has priced the new number and trading resumes as normal. This also can work when a significant announcement has been well publicized. It is an excellent time to sell option premium.
It even is common for the option to price in the most extreme possibility in the first day and then adjust its value lower as the price of the underlying continues to move toward it. These can be ideal conditions for collecting fat premiums.
Again, however, only risk this if you have ample evidence that the fundamentals are on your side. Other types of volatility surges, such as weather events, failed harvest, elections.
Many old-time traders favor the “Wall Street Journal Rule:” If a commodities story makes the front page of The Wall Street Journal, it’s time to fade the story. This is not a guaranteed strategy, of course, but it does provide an objective guide to selling options against the hype to collect bigger premiums.
How to collect more option premium
Over the last years we have seen that stock prices increases steadily. People had much trust in the markets and volatility dropped. How do you find new opportunities in this market. Is there another way to get more option premium?
Companies announces regularly how they are doing. Some companies even pay dividend. At the time that companies announced their earnings trades get nervous. And therefore the prices op the options rice. This is an excellent way to receive more option premium.
There are several ways to collect more option premium. When uncertainty rises volatility will be higher. Volatility is driven by binary events like earnings announcement, power shifts as well as natural disasters. These are excellent times for option sellers to receive more option premium.