How to Profit from Option Premium Decay

Option Premium

Option Premium is the price you have received or paid to acquire an option. Options  opens the door for big profits. It also helps you to prevent losses. And, unlike actually buying shares you can obtain a significant position in the stock little capital.

Selling options with high Option Premium is another way to profit from option trading. The basic idea behind the option selling strategy is to hope that the options you sold that you will buy them back for a much smaller price.

 

Why selling option premium

Would you like to collect income regardless of the see-saws in the market?  What is needed is a stock with options that have high implied volatility. The higher implied volatility means there’s more premium to collect

 

Time decay or Theta Decay

The option buyer have to pay money to the option seller for granting the right to buy or sell stocks for a certain price and time. Investors who sell calls or sell puts are selling option premium as a source of current income.

The price of an Out of The Money option will decay every day a little bit, until it expires worthless. This fact is at the advantage of the option seller.  Theta values are always positive for short options.

It doesn’t matter whether you are selling or buying contracts. Understanding how option premium is made of, is essential for long term success. The more you know about the option premium, the better you can recognize a good deal. It helps you also to defend the options position when the odds are against you.

Traders must understand all of the things that can influence the price of an option. This will help to understand their risks as well as have the highest probability of profit.

Conclusion

Sell options in order to collect option premium. In this way you can earn money in a whip saw market, it doesn’t move the direction you desire or when the stock doesn’t move much. You never know if or when an stock is going to move (much). One thing we know for sure over time option premium (Theta) will decay. With selling options premium you can make money over time and the stock doesn’t have to move at all. It is very profitable to be a premium seller and profit from theta decay. Read also our article on time decay your best friend or why selling options

 

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