Selling Options Premiums is smart way of trading
Selling Options Premium is the most important concept for trading options. Beginning options traders often begin with just purchasing calls or puts. After some time they discover that the price of the option is influenced by more factors than the movement of the underlying.
Every single option trade has a buyer and a seller. Usually it’s the public buying options and the Market Makers handling the order flow and maintaining an orderly 2-sided market.
Options have an expiration date and if the underlying does not move much premium decays litle by litle, every day. So buyers of options not only have to predict specific market direction, they also have to know precisely when that move will occur and how far it will move in order to make profit. Therefore they rather sell options.
We choose options which has high implied Volatility. Selling Options Premium is better than buying. By selling options for premium you move the break even in your favour. This impacts your probability of profit a lot. When the stock moves up, down or even slightly goes against you, you still may keep a portion of the premium. If it head to the desired direction you can take the position of the board and keep the profit.
Selling Options Premium
We typically sell options (spreads) with around 45 days until expiration. Options with this time frame decays fast. We manage trades eartly. As soon as you can take a profit of 25% or more you close the trade.
So one of my preferred ways to garner that rapid decay in time premium and Theta is to sell front month out-of-the-money Call or Put spread. The “spread” part means that we are selling one option and buying another in the same amount. We receive a net credit (cash) for the trade.