Why Sell Out Of The Money Options

why Sell OTM OptionsIn this up trending markets many people sell OTM options. Especially out of the money puts has many benefits. You will receive option premium and the win rate or probability of profit is very high. You can make profit if the stock remains stagnant or even falls a little amount.
When you want to sell otm option of expensive stock and are afraid of the risk of naked option, you may choose a different strategy. You can reduce your risk you by selling an option spread instead of naked option. Furthermore you have are limiting the margin requirement by selling put spreads instead of naked puts. With this approach you substantially increases risk and the amount of possible profit.

Introduction to Out Of The Money Options

You may have heard about how profitable it is to sell out of the money options? But what exactly does Out of The Money Options mean? Selling Out Of The Money Options has a high probability of profit.

A call option is Out of The Money when the strike price is above the stock price. A put option is Out of The Money when the strike price is below the stock price.

An option is Out Of The Money if it contains only extrinsic value and no intrinsic value. An OTM Option will expire worthless upon expiration due to Time Decay.

 

When Is A Put Option OTM?

A put option is considered Out Of The Money when the put option’s strike price is lower than the stock price of the underlying stock. This allows you to sell the underlying stock for lower than the prevailing market price which will not make any sense and therefore contains no intrinsic value.

Example : If GOOG is trading at $300, it’s $200 strike put options are Out Of The Money ( OTM ) as it allows one to sell GOOG at $200 when it is trading at $300 now.

Here is a table explaining the status of a put option against its underlying stock :

Assume GOOG trading at $300 now.
Put Option Status Strike Price
OTM $200
ATM $300
ITM $400

If you want to trade high expensive stocks you rather sell spreads instead of naked options. With spreads you have defined you risk and reward. And you also have to put up less capital to make the trade.

 

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