Strangle Options Strategy » Money

How To Make More Money Using Options In Online Investment

admin — Tue, 19 Jan 2010 21:02:55 +0000

Learn how to make more money using options in online investment techniques. After all for years savvy investors have been using option trading strategies to increase their portfolio profits. Options are the key to financial freedom so you should learn how to trade them for yourself.
Up until the 1990’s options was a game for the rich who loved the large profit potential. Today electronic option trading is offered at very affordable rates and you need to learn make more money using options in online investment techniques. The game that once belonged to the rich is now open to anyone.
Your personal wealth is tied to how well you are educated in investments which are the key to that wealth. So learning make more money using options in online investment techniques is critical. Stock options are simply an option to buy or sell stocks at a future date for specific price. These investments can be complicated and a little bit risky but you can make more money using options in online investment techniques.
Each stock option will list the name of the stock, strike price, premium paid for the option, and the expiration date. Calls and Puts are the two types that are most popular. Calls allow you to purchase the stock at the strike price at any point before the option expires but there is no obligation to do so. After an option expires it is worthless. Puts are the exact image of the call except instead of purchasing you are selling. You will want to learn make more money using options in online investment techniques.
The object is not to exercise the option and buy or sell the security. Instead if you originally wrote a put you would buy back the option or if you originally bought a call you would sell the option. Doing this saves all the commissions and added expenses. Leaning how to make more money using options in online investment techniques will show you how to exercise this option.
There is no question that options are risky but they can also be very profitable. A good way to get involved in options is to start by taking an options course and learn make more money using options in online investment techniques. Begin by writing covered call options for stocks that are currently trading below the options strike price. It’s time to make more money using options in online investment techniques. Are you ready?

George Fontanills Incorporates Options to Lower Risk

admin — Thu, 14 Jan 2010 20:50:28 +0000

Trader George Fontanills first began utilizing options in order to go “delta neutral” on his futures positions, which would allow him to “still sleep well at night.” Since he began using options in conjunction with his futures trading, Fontanills believes he has found a way to accelerate his profits while decreasing his risk.
Fontanills began his professional life as a certified public accountant, but “decided that being a CPA wasn’t for me.” After earning a degree at Harvard Business School, Fontanills got involved in the real estate market, but then “the real estate market died.”
In 1988, with a few other partners, Fontanills decided to give the futures market a shot. “We hired a couple of guys. They happened to lose 10% of our money in 30 days and I thought ‘Hey, I could do that,” and Fontanills began to explore trading on his own.
In a systematic fashion, Fontanills studied the market. “I was probably one of the first users of Omega TradeStation and I started writing programs to try and figure out all the variables that were involved in a trade,” he explained.
“The first thing I figured out was that volatility and movement in a market meant that everyone was confused,” he said. To this day, Fontanills says he searches out markets with high volatility in order to place his trades.
Originally, Fontanills began as a day-trader, believing he could better control his risk in that fashion. However, he began to believe that he was missing a lot of the moves, which occurred overnight. At that point, Fontanills began to study options strategies. “I learned how to use options and how to become delta neutral so I could hedge myself in both directions and still sleep well at night and that’s when I really started to accelerate my profitability,” he said.
“Delta, by definition, is the rate of change of a price of an option to the rate of change to the price of the future,” Fontanills noted. “It’s how fast an option will change, relative to the speed of the futures.”
“Delta neutral means whether the market goes up or down, I’m in a position to make money,” Fontanills said. For example, “I’m short wheat and long two wheat calls, at the money. If wheat goes down, I’m making money on my short wheat position and eventually the rate of change will allow me to make more money on that position.”
While he notes that some traders tend to be scared away by the perceived complexity of options, Fontanills said “someone who can figure out how to make money with options can make money easier and safer than just using futures.”
In terms of fundamental factors, Fontanills said, “I don’t ignore fundamentals because I like to see what other people are thinking. Most of my money is made being a contrarian to what everyone else is thinking. The masses are usually wrong.”
In searching out his current trades, Fontanills said, “I look at the momentum of what is happening. If volatility and momentum goes to a certain level of what is way out of line, I’m looking for a reaction in the other direction and then I put on a trade … my greatest returns are made when something is really out of whack.”
The main future markets Fontanills trades are gold, oil, agriculturals (soybeans and wheat), S&P 500, interest rate markets and currencies. “I’m looking for fast, volatile markets and the S&P and bonds are definitely up there,” he said. Typically, Fontanills said his trades last “thirty days, at most.”
Advice he has for beginning futures traders: “Trade small–until you learn what you are doing. “Everyone overtrades at the beginning. I probably lost 20% of my account on my first trade,” Fontanills admitted. “Learn how to use all the methods that are out there to trade … learn how to use options, because every successful trader I know, knows how to use all instruments. Why reinvent the wheel? Follow the (methods) of people who have been successful,” he said. He does note, however, the importance of “whatever methodology you use, it has to fit your personality.”
Finally, of course, “learn how to limit your risk … if you can stay in the game long enough, you will learn how to become successful,” Fontanills said.

How Do You Sell Options To Generate Amazing Returns?

admin — Sun, 13 Dec 2009 23:51:09 +0000

In this article we will look at how to effectively implement this strategy to increase your wealth. But before we do it’s important to recognize that this strategy offers you the benefit of cash returns and easy access to your capital. Why are these things so important?
Cash returns:
Let’s look at cash returns first. The best way is probably to use a comparison to another investment alternative such as property. Too many investments don’t offer you good cash returns (only good capital returns), but your ability to generate cash is essential to achieving the freedom you need to pursue attractive wealth creation opportunities. In the UK at the moment the average rental property will generate approximately 5% return. Let’s say you need $50,000 to live each year and you have managed to accumulate $100,000 in savings.
If you decide to buy a $200,000 property and you invest your $100,000 and borrow the balance at 5% you would generate a positive $5,000 net cash return every year (assuming no other property related costs such as management fees, repairs, etc). In essence you’d have to by 10 properties to generate the $50,000 annual cash you’d need to survive. That could take a long time and in the mean time you’re spending your productive hours working for someone else to earn a paycheck to live off…and missing loads of opportunities. I love property as an investment and own numerous rental properties but it is not a great method of generating cash flow…well not without a great deal of work!
Selling options on the other hand can pay you a cash flow in the terms of a premium every month or two. It’s a regular cash flow that you can use to help you quit your job and spend your time building your own wealth rather than your employers. Using effective options strategies that generate between 30% and 50% returns per year would earn you $30,000 to $50,000 per year off your $100,000 savings in a regular monthly income. This would give you incredible freedom and independence to spend your productive hours working for you not an employer. This is the importance of cash flow.
Access to capital:
The second key thing to remember is that options allow you quick access to your cash. Property in contrast takes many months and large costs to realize your cash investment. Your option investments require you to place initial margin with your broker to cover the risk of potential losses, but since your options expire every month or two you receive your initial margin cash back each time. Also it is really easy to buy or sell your options back at anytime at a very small cost (commission) to gain immediate access to your cash if you need it. This is often one of the main benefits cited by Wall Street to investing in stocks.
So now that you know two crucial reasons why options are vital to your wealth creation arsenal it is time to examine option selling strategies…
Option selling:
I like to use an example as a way of illustrating the strategy of selling options as a means to generate brilliant returns. I’ll assume you are familiar with selling calls and puts and that you know your returns are limited to the option premium you receive and that your losses are theoretically unlimited. Though I will elaborate on what this really means as we work through the example.
On the 28th March 2008 gold was trading at $932 an ounce. The June 1 $700 put was bid $0.90 which means that each option is trading at $90 (i.e. 100*$0.90). Now at this stage it helps to actually have a view on the instrument you are trading. In the case of gold I have been extremely bullish for a long time due to a number of factors including the high U.S. inflation rate, collapsing U.S. dollar, poor current account, falling interest rates, huge government and private sector debt etc which all indicates that investors will move their money to a “safe” investment…gold! Now the point here is that I don’t know when gold will rally nor do I know that it will rally really at all…what I’m confident on is that it won’t fall very far. This means I can sell put options confident that fundamentals mean that the price of gold should not fall from current levels…and even if it does it’s not going to fall to $700 an ounce by 1st June.
Each gold option is worth $93,320 (i.e. $932*100) so selling one option and earning $90 in two months might not sound like much but we need to look at it from a few different angles. A $90 return over two months on $93,320 is an annual 0.6% return which quite frankly is rubbish, but this is not the way to really look at this investment. The notional (face value) of the option really doesn’t matter. Why? Well because that is not what you are paying for the option. You are not really buying $93,320 worth of gold (or even $70,000 worth at the strike price), but rather a way out-of-the-money put which requires you to only pay a small initial margin.
The initial margin on one gold $700 option is about $900 which means that over a two month period I would be able to generate a $90 return on a $900 investment. Viewed this way my return would be 60% per year (i.e. 10% every 2 months)! Now that’s an amazing return…so does this mean I should rush out and sell 100 puts and generate a $9,000 cash flow over the next two months? Well not unless you were worth millions I wouldn’t recommend it. Why? Because the unforeseen can happen. Selling 100 $700 put options means that for every dollar the price of gold falls below $700 you would lose $10,000 (i.e. 100 options * $100). So if the price fell to $650 you would lose $500,000. Ouch. So what do you do?
You strike a balance. You never expose yourself beyond what your can afford to lose in an individual trade and you manage your risks via stops. Taking the $100,000 cash worth example what would happen if you sold 5 options. Well you could earn $450 in two months (i.e.5*$90) equating to $2,700 per year in income. Your initial margin to the broker would be $4,500 (i.e. 5*$90) still giving you a 60% annual return. Your risk is now $500 per dollar below $700, which is a fully manageable exposure on your $100,000 capital given the extremely unlikely possibility of gold falling that far.
The second way of managing your exposure is through stops and the KISS method is always the best method. Easy to understand and easy to implement. The two best methods I know of are:
1. to stop out when your option doubles in value against you (or triples for the more adventurous). This method is simple and effective for the more risk adverse investor. I’ve found that it’s not always the best when you are selling way out of the money options as you can be stopped out but still never really be at risk of your options being exercised, thus forcing you to take losses unnecessarily. But it is the safest route.
2. to stop out when the price of the underlying reaches your strike price. In our example your stop would be at $700. The problem with this method is that your losses would be much higher than the first method but obviously the likelihood of your stop being breached are much lower.
The strategy I usually use is to find many of these attractive deals and never expose myself too much to one trade (a lesson I’ve learned the hard way!), which will ensure you will sleep peacefully at night…just as I do! So if you take the above scenario how many trades should you place at any one time? Well you need to find a balance between putting your capital to work (i.e. your $100,00) which is used it as initial margin on trades and saving enough of it such that you can meet margin calls if positions go against you in the short term, so you are not forced to close positions or make margin calls. Again applying the KISS method is easiest and the simplest way is to put no more than 50% of your capital as margin at any one point in time. Any more than this could lead to unnecessary stress of margin calls if positions go wrong and means your positions are too large.
Taking our gold example and replicating it to other trades we could place $50,000 as initial margin which would generate a $30,000 annual return ($90*$50,000/$900*6) or a 30% annual return. I now enjoy a fantastic regular income on my cash capital through options investments and non-stressfully earn a comfortable 30% to 50% annual return on my cash capital.
The final word on gold…
Was I right about the price direction of gold? Yes and no. The price of gold (at the time of writing) has actually fallen to $882 (it has been as low as $850) so my expectation that gold would rally from $932 proved slightly wrong (or at least premature!), but was i really wrong? Well the price of my options have fallen over the past month and a half from the $0.90 I sold them to be worth virtually nothing. So even though the price of gold has actually fallen I’ve made money…wrong and still right! Options are truly an effective wealth tool.

Learn How You Can Make Money Trading the Forex Market

admin — Tue, 08 Dec 2009 22:31:52 +0000

There are many options you can use to make money in the forex market. This discussion makes sure that you are considering all your options when looking at Forex Trading as a money making opportunity. After all, the main purpose of Forex Trading is to make money.

There are so many forex traders that follow a particular way of forex trading and in the end don’t succeed in the main goal of making money. This is because their ego, pride and determination to succeed at a particular method has the effect of blinding them to other forex trading money making opportunities. Let’s look at these Forex trading money making opportunities in more detail.

Option 1:- The self trader is someone who generally develops a personal money making trading method. This is done by doing a few forex trading courses, reading a few trading books, experimenting with a number of trading techniques, demo trading and live trading until a personal money making trading style is found. This is a long and challenging process and it can take years to get there. It is estimated that only 3 ‘ 5% of serious traders succeed in making money. This is worthwhile as once you have achieved this you have a money making skill for the rest of your life. Unfortunately this route can take considerable time and effort to make real money.

Option 2:- With the growth of part time traders (who mainly have day jobs) an alternative to the above forex trading money making approach has become very popular. Money can be made by buying a forex trading system that has been tested and proven. The system is either delivered as a live course, as a book or Ebook or even purpose built software. The idea is to then merely follow the rules of the system by the letter. Although not entirely for novice traders this approach has the benefit using such a system is that it may have been thoroughly tested and proven and could cut years off the option 1 alternative. Some of the programmed money making forex trading strategies (for example expert advisors) can even be linked to your dealing station automating the whole forex trading money making process completely.

Option 3:Make use of a good Forex alert or signal service and copy their recommendations. Make sure that these services have a good record of consistent money making. Transactions can be found by using electronic trading rooms which trade in a live environment. Alertnatively deals can be received using SMS signals, emails or by gaining access to a password protected members only website. You would then “blindly” copy all the signals or alerts into your broker dealing station and hopefully make lots of money from that.

Option 4:- Delegate the forex trading money making process completely by giving your money to a Forex trading money manager who will trade it for you.

All the money making options above carry considerable risk if not performed in a careful and in a thorough way. Many Forex traders are caught in Option 1. They do not consider other great money making opportunities available to them. If you fall in this catagory consider all the options open to you. The other alternatives could be less stressful and emore profitable.

If you are new to Forex Trading be aware and investigate all the Forex money making opportunities, because there are many if you are prepared to do your homework finding them.

There will be follow-on articles going into the above options in greater detail. These will be featured in this directory. Make sure you do not miss them.

Option Trading: Thinking “Outside the Box”

admin — Mon, 07 Dec 2009 20:43:04 +0000

Wouldn’t it be great if we could buy an option with five months left until expiration and sell an option with 2 months left until expiration for the same price? You couldn’t lose. Well we can’t. I love options spreads so much I realized something very important. We can buy a spread that has a lot of time value left at almost the same price as we can sell one with less time value left. The reason really opened my eyes and gave me new insight into options. Here is what I came to realize.
I started comparing how expensive options were in relation to the other strike prices in the same month and to the other months. I wanted to know based on th e price per day which options were more expensive.
The first 1 or 2 option months, as everyon e knows loses time value quickly. The at the money strike prices are very expensive compared to the out of the mon ey strike prices. Since there is not that much time left, how much can they charge for an out of the money option? Not much.
The next several months, the opposite is true. Compared to each other, the strikes that are closer to the money are cheaper in terms of price per day than the options further out of the money. Let me explain it another way using the S&P market.
6 days left at the money option cost 12 points
6 days left out of the money option cost 2 points
70 days left at the money option cost 43 points
70 days left out of the money option cost 29 points
There is more than 10X the time left but the 70 day at the money option (43 points) is only less than 4X the price than the 6 day at the money option (12 points).
The 70 day out of the money option (29 points) is almost 15X the cost of the 6 day out of the money option (2 points) but only has 10X the time value. We will buy the cheaper options and sell the more expensive ones.
Sell 6 day at the money and sell 70 day out of the money. Buy 6 day out of the money and buy 70 day at the money. This will be done for a 4 point debit. We are now buying a spread that has 10X more time value than the one we are selling and are only paying 4 points for it.
When the 6 day options expire we can sell the next month to take in more premium, still keeping the 70 day option spread.
What goes up, must come down! We have all heard this befo re in reference to the laws of Gravity. We have laws in the commodity markets as well. What comes down, must go up! The greatest traders of our time like War ren Buffet know this. He is perhaps the greatest Stock trader ever. He had never traded commodities until a few years ago. He bought silver in the futures market. When the market went even lower he bought more. The “smart money”, commercials will not be scared into selling when a market they have purchased drops even further. They know better than anyone that a commodity has real value and will always be worth something.
There is a famous book, “You Can’t Lose Trading Commodities”. The author buys commodities and then just waits for the market to go higher. He would purchase more as the market fell.
You need a big bankroll for this. Personally I know corn won’t go to $1.00 but what if it did? I want to minimize the risk in case I want to end the trade.
I started trading the Soy Complex this way several years ago. Not with options. Strictly futures. I bought what was similar to a crush spread. I increased the contracts as the market went against me until the spread rebounded a little. Since I increased the contracts I didn’t need the market to come back to where I started. It only had to rebound to the next level.
Black Jack players did this until Casinos caught on and put limits on bets. It is a known fact that futures traders make good gamblers and professional gamblers make good futures traders. I am against gambling but even gambling done with a system is not really gambling.
These card players would bet something like this: $5 lose, $10 lose, $20 lose, $40 lose, $80 win. The losses add up to $75. They would win $80, so the profit is $5. Not a lot, but they would do this all day. Black Jack is just under 50% probability for the player.
The problem is there is a slight chance that you could lose 40 times in a row. Now with Commodities we have a 50% probability and we won’t lose 50 times in a row because the market can’t go b elow zero.
Now before I go an y further, I need to tell you that I am not recommending you double down on your trades. What you can find are mark ets that are near their lows where you can do a small scale trade. Spreads offer even better opportunities. They have a closer range (high to low).
By now you can see we only use this to go long a market since we can never b e sure how much a market can go higher. First we need to find a market that is low already so we won’t have to wait that long and also so there will be less capital needed. I prefer to trade this using options. There are many ways to do this. You could buy an option in a market like soybeans and choose how many cents the market will drop before you buy more. The problem is, an option is a wasting asset. The Theta (time decay) would cause you to lose money.
I use spreads so I am not paying for time decay. I will probably sell more Theta than I buy, so if the market does nothing I will make money just on time decay.

Selling Options… Is It Really One Of The Best Ways To Wealth?

admin — Sat, 05 Dec 2009 13:06:45 +0000

Warren Buffet has become something of a modern day financial icon. A beacon to the success that can be achieved in the free markets. He has just been officially named as the richest man in the world, worth a staggering $62 billion. His company, Berkshire Hathaway, has beaten the S&P 500 index by 14.65% over the past 30 years. His investment strategy has been closely examined yet few follow his incredibly successful investment style and as a result miss these stellar returns. Why? Because his investment style is boring. What I mean is long term in nature and rather inactive. It’s steady as she goes. It’s not a fast paced, action packed ride to riches. It’s a slow consistent walk to wealth.
So what does all this have to do with option selling? I’m glad you asked. While Warren Buffet does not sell options to generate his wealth, the concept of option selling is also slow and on the whole rather boring. It is not fast paced nor will it result in a fortune being amassed overnight. But sure as the sun sets at night and rises in the morning it will provide the educated and patient investor with fantastic returns and wealth.
Selling options mean selling either calls or puts (or both). If you recall the definition of an option is a contract which conveys to its holder the right, but not the obligation, to buy (calls) or sell (puts) shares of the underlying security at a specified price on or before a given date. This right is granted by the seller of the option. So it is the option seller who has the obligations because they have sold the rights to the option buyer.
The option seller receives the option premium in return for giving the right to the option buyer. The option premium represents the entire income the option seller can hope to achieve, while his losses are theoretically unlimited. The option buyer on the other hand can only lose the option premium while his return is theoretically unlimited. So why would anyone sell options? Why doesn’t everyone just buy options if they have limited loss and unlimited profit potential. The main reason is probability!
Options are very much like a raffle ticket. When you buy a raffle ticket it costs you very little and the vast majority of times you don’t win anything. You simply say to yourself that it’s cost you only a few dollars and if you were the lucky winner you’d have won big. But why do raffles exist? They don’t exist with the winner in mind. They are not altruistic games designed to give more than they take…oh no, quite the opposite. They are designed to offer the raffle holders a nice return on their raffle.
They know that the cost of paying the winner is less than the income they earn. The same rules apply to options. Investors who understand options know that over time that the loses they have to pay to option buyers will be less than the income they earn from the premiums the buyers pay. Studies suggest that between 75% and 80% of options held to expiration expire worthless. This means that option sellers win 75% to 80% of the time!
In addition to probability there are other reasons in that make selling options incredibly attractive as a wealth creation strategy. They include:
* Excellent returns
* Set and forget
* Inbuilt safety factor
* Consistent income
* Win in all market conditions
* Less risk
* Time is on your side
Let’s quickly look at each of these in turn…
Excellent returns:
Selling options can provide a knowledgeable and experienced investor amazing returns…returns like 30% to 50% per annum. One of the best ways to look to understand this is to look at a simple example. Gold in February 2008 had just broken $900 an ounce and all the news was majorly bullish for gold. It had already seen a spectacular rise over the past few years but market conditions meant there was every chance it would continue to rise…but most importantly it was not about to fall…at least not beyond a natural pull back.
Someone was willing to buy the 01 June 08 $525 put options for $0.10. I guess they figured “what the hell it’s only 10 cents per option…it’s worth a punt.” Fantastic! I knew that each option I sold represented $10 (100*$0.10) in income and the initial margin was $34 per option. Gold would have to fall by a whopping $400 an ounce in a little over 3 months to be exercised. Now I’d probably have better luck winning the lottery than being exercised on these options (and odds on winning the lottery in the UK are about 14 million to one!).
Now $10 may not sound like much but we need to look at this in terms of return on capital invested. If you can generate $10 on $34 worth of capital invested you are returning nearly 30% over 3 months, which is nearly a 250% compound return per annum. I’ll take those odds and that return!
Set and forget:
While I never suggest that you ever invest in anything and totally ignore it from then on, selling options is about as close to this as it gets. When you sell an option you target options that have very low chances of ever being exercised. How? You look for way out-of-the-money options and you apply sound fundamentals. For example, the Dow at the end of Feb 2008 was 12,700 and all the news was incredibly bearish for the markets. Inflation was at record levels, the dollar was in free fall, house prices were plummeting, consumer sentiment was falling, retail sales were stalling, credit markets were frozen, profit warnings were occurring daily and so on.
I was totally comfortable that the Dow was likely to fall, but what I couldn’t predict was when and by how much and whether it might go up slightly before it went down. What I was certain was that it was not about to trend upwards. Selling futures, CFDs, spread bets etc requires excellent timing. You might be correct on the overall direction, but without deep pockets you could get stopped out first before the market moves your way. The solution? Sell deep out-of-the-money Dow calls. I sold 15 May 13,500 call options for $140 premium. That means that the Dow would have to rally above 13,640 before I would start to lose money. That is not far from its all time high! At writing the Dow is at 12,200 and my calls are now valued at $17 giving me $123 profit per option. I don’t have to watch my calls minute by minute, hour by hour, day by day. I’m totally comfortable that they will expire worthless and I will earn $140 per option.
Inbuilt safety factor:
One of the biggest problems with using stocks, futures, CFDs, spread betting and other financial products that have a linear type return (i.e. their value moves up and down at the same rate).This means that you need to have excellent timing and deep pockets to use them effectively. While I love the adrenalin that these products give me they do not have the type of safety factors that help me to sleep well at night.
How many times have you bought a stock, futures contract etc on the expectation that its price will rise and sure as night follows day the price immediately starts to fall. Soon you find yourself stopped out only to see its price turn around again and rally just as you originally predicted. Essentially these products give you only a small margin of error. If you have more money to play with you can afford to place wider stops, but the fact still remains…you need to time your entry and exist points fairly accurately.
We all know that markets do not move from point A to point B in a straight line…they zig zag their way there…sometimes with quite violent corrections. The more volatile the market the more difficult using linear products becomes, because your likelihood of being stopped out increases. Options give you that margin of error that means you don’t need to worry about timing to anywhere near the same degree.
Option sellers have a much higher degree of staying power. They can withstand the zig zagging of the markets much better. For example, if a market is in an uptrend you can sell an out-of-the-money put at a level that gives you a very large level of comfort that the price will never fall to a level where your option will be exercised. Timing the market is much less important.
Consistent income:
Those that sell options can enjoy a regular income month after month. It will not provide you with a 1,000 percent return in a year, but with education, practice and good option selection you can enjoy 30 percent to 50 percent annual returns. But there is a lot to be said for receiving excellent, regular and fairly stress free income. Everyday your options are getting closer to expiry and time decay is eating away at their value. Every month you can receive income from your options expiring.
Win in all market conditions:
It is said that markets go up, down and sideways. In actual fact they go up a little, up a lot, down a little, down a lot and sideways. With linear products you can only win with one third of the movements. For example, if you are bullish, then you will loose if markets go down or sideways (or at least not gain anything). However, if you sell a deep out-of-the-money put option to take advantage of your bullish view then you will win with four out five market movements. In other words you will win if the market goes down a little (it will not hit your put’s strike price), stays flat, goes up a little or goes up a lot. You will only loose if the market falls sharply.
Less risk:
When most uneducated investors think about options their first reaction tends to be “that sounds risky”. In actual fact options are a lot less risky than trading stocks, futures, CFDs etc. The key reasons why options are less risky are:
* Inbuilt safety factor – options have an inbuilt level of safety because you can sell out-of-the-money options that are very unlikely to be exercised.
* Most expire worthless – we know 75% to 80% of options expire worthless.
* Insulation from market movements – Option prices do not move one for one with the underlying price. In other words if the price of the underlying goes up one point your out-of-the-money option price will only change by a fraction of this, say 0.25 points. This means that if the market moves against you your option price, and thus losses, will not increase anywhere near as much.
* Less likelihood of being stopped out – by selling out-of-the-money options only on extreme market movements will stop you out.
Time is on your side:
Those that buy options need the price to move beyond the option strike price (plus the option premium) before expiry if they are to make money. From the moment they buy an option time is working against them…it is a race that the price can move enough before their time runs out. For the option seller it is exactly the opposite. From the moment they sell their option they have been paid and the option’s time is working for them. Every day the option’s worth becomes a little less to the option buyer and a little more to the option seller. The option seller does not have the pressure that time will run out…the option buyer always wants more time, while the option seller happily watches time run out.
I hope you’ll agree that option selling is a powerful method of generating low pressured, consistent and extraordinary returns. Novices steer clear of options. Those that are uneducated buy options outright. Experts sell options. Writing options is not for everyone…in fact it is only for experts. Don’t be put off by that…become an expert…anyone can. Then you can receive the rewards that are just waiting for you.