Ins and out of Selling Options
Some people doesn’t like to trade or sell options because they think it is to risky. Is it really true? Do you take on more risk by buying stocks than selling options?
Imagine you are interested in stocks of Facebook. Facebook is doing well since they are listed on Wallstreet. It is trading for $74.82 dollar nowadays. If you buy 100 share you need to put up $7.482 dollar. The stock price may go up. But what if the stock price drops much, you might experience a great loss.
Can you get rich selling options? If you buy stock you have 50% chance that the stock price will rise. And it is risky to have only stocks from one company. Therefore you want not put all eggs in one basket and you choose to buy stocks from different companies. You have to pick the right kind of stock that has potential. After time, some of your stock may increase in worth and other may decrease. The chance that the net worth of your total portfolio will increase goes down each time you buy stocks from different companies. In stead of buying stocks you might think of trading options. It is not an unknown secret, “80% of options held through expiration will expire worthless.” So why not selling options?
Sell options like a professional
Become a pro by selling options, and using the right kind of strategies. You want to put up trades with a high probability of profit. Not only are you no longer trying to predict what the market is going to do, you no longer have to pick when it’s going to do it. With option selling, you are only selecting a price level the market will not reach (above or below the market) over a certain period of time. As long as the underlying future price does not reach your strike prior to expiration, the option expires worthless and you, the seller, keep the premium collected as profit.
With options you have more leverage. One options controls 100 shares, and you don’t have to spend far less money to buy one option.
No matter what people say, nobody knows what any market is going to do, especially on a short term basis.
If you are bullish the natural gas market, you might sell an out of the money put option. In this case, the market can move up, stay the same or even move down, as long as it is above your strike price upon expiration, you will still take your full profit. Use this strategy not for expensive stocks though.
If you are bearish you might want to sell a call spread with one side in the money and one side out. You probably want to buy the spread back when the underlying is near or below your long call. In this way you make a nice profit.
What about the Risk?
Of course, option selling is not without risk. Taking steps to put probabilities in your favor does not mean you cannot lose money. The theoretical loss on an option sold uncovered is unlimited. Therefore an active attitude for managing risk and defending losing positions is imperative.