Collect Option Premium in every market condition
Would you like to collect option premium, that is to earn money regardless whether the market is going up down or sideways? We will describe how to use two complementary strategies for collecting short term money.
We start the strategy with selling a put spread. We do that time after time until we got assigned. Then we apply our second step and turn the position into another profitable strategy.
We want to create the strategy with an inexpensive stock which has a high implied volatility. There are several platforms who show implied volatility easily, like TOS and Dough. Dough is a very beautiful platform. We use this platform to sell options and receive option premium. Let me show you an example.
The first strategy is collecting option premium by selling an at the money put spread. Currently the stock is trading at $25.82, and 9 days remaining until expiration. We can sell the 25 strike put for 51 cents credit. We’ll also buy the 22 strike put for 10 cents as protection for 10 cents. Just for safety in case the stock drops. The net credit for the spread is now $0.41 and has a maximum risk of $2.59. In this instance the credit you received represents a potential of 10% ROI in 9 days.
If the stock doesn’t move at all or rises much, the spread will drop in value. By expiration, if the stock is a little bit higher than $25, then both puts should expire worthless then you can keep the full credit as the income.
Though the price of the options are almost zero they can still be exercised. So best practise is to buy the options back. Some brokers have lower commission costs to close short options below five cents.
After you bought back the short option, you are going to sell the at the money put spread again for the next expiration cycle. The next expiration could be one week away or a month. Sell the at the money put, and buy a lower strike put, as a short vertical put spread. Which strike do you select? Look for an inexpensive option. No more than five cents just to hedge the downside risk.
You may repeat this trade and collect option premium every expiration cycle until you get assigned the stock. You need to be prepared to buy the stock. What do you do when this is happening? Then the second strategy comes in you turn it into a collar.
What to do after you are assigned
With this strategy an investor sells a call option and buys a put option with the same expiration on which you were just assigned. Let’s assume the 25 strike again for this example.
If you understand synthetic positions, you’ll see that owning the stock and selling the 25 strike call is the same as a short 25 strike put. By buying the out of the money put for protection, when adding this position you create a short put spread.
If the stock at expiration is below $25, you can keep the credit that you received from the call. And your long put protected your stock against price drop. If the stock price rises and expires above $25 then you sell the stock for the same price you bought it for, and you still keep the credit you have received.
You can repeat this strategy, as long as the Implied Volatility remains high. On the other hand if the implied volatility lowers, then it’s time to find another stock. You may apply this strategy again and again. When you use this strategy for months, the credit will start to add up regardless of which way the market moves. And you will be able to collect option premium every month.
I’ll trust that you find this a profitable way to make money that is to sell option premium under every market condition and to earn a decent profit again and again.