Most traders don’t consider selling options, as they see it as too risky – but the odds of success are high, and if you do it correctly, you can reduce risk, and make huge profits over time, with the odds firmly on your side.

How to Sell Options

Selling options offers unlimited risk, with limited profit – and that’s why many people don’t like selling options. There’s a high amount of risk for a low reward – but to balance this, the odds of success are high – very high!

Options buyers think they have a great deal – with unlimited profits, and limited risk – but the odds are simply not in their favor. This is very similar to the losing gambler, who backs the outsider – sure, the rewards are fantastic – but the chances of winning are slim.

The key to option selling, is that you’re trading with the odds firmly on your side – and you can improve your chances of success, by following these five tips:

1. Let time decay work in your favor – the less time an option has to expiry, the more time decay will hit value – increasing your odds of success.

2. Sell into price spikes, when markets move quickly, sell premium. Great markets are those that have had unsustainable price moves that are due a pullback.

Great markets to sell options in are ones driven by greed and fear.

Watch the papers and newswires for markets that have heavy public participation – and there are “sure fire” reasons the move will go on forever. You know the move won’t go on forever, and a pullback will occur – and you can collect sizeable premiums from the inexperienced traders, who believe the hype.

3. Diversify your selling across a number of uncorrelated markets – keep in mind that you have unlimited risk, so don’t have all your eggs in one basket.

Not every trade will go in your favor, and there will be moves that see prices spike, to trade in the money against you – make sure you have a wide enough spread to cover losses.

4. If in doubt get out – if the option you have trades in the money, get out and cover – to succeed in options selling requires great discipline in these situations.

5. Ensure you have adequate capitalization – to hold your positions to expiry.

In the short term the value of your portfolio will fluctuate so have enough reserves.

90% Odds of Success – but a Warning!

Option selling is for experienced traders only – those who have discipline, a sound method, and have the capital to diversify.

While the odds of success are high, before you start, make sure you approach option selling with the right mindset.

Take Advantage of the Buyers, and Collect their Premiums!

A long-term strategy, can and will make you huge profits over time. The odds of success are great – and there are plenty of inexperienced traders, buying options on broker recommendations, greed, and fear – which can, and will provide you with fantastic long-term gains.

Option selling is more lucrative than option buying – and this is not just a view – it’s a fact.

To make money in options, learn how to sell correctly – and you’re on the way to huge consistent profits.

There are many situations where option rollouts may be used. For purposes of this article, being limited in scope, I will just touch on two of the more practical uses of the rollout process. The first is the benefits it gives the covered call player. The second is the remarkable ability of the rollout feature to offer protection against the potential for loss that faces the naked option writer.

How does a roll out benefit the covered call player? Consider this scenario: you own 500 shares in a company which you originally bought some time back at a price of $50. Assuming the market has recently gone on an uptrend and your stock has now appreciated to $60. You are tempted to sell and take in profits from your investment. At the same time you don’t want to miss out on any further upward movement the stock may take in the face of what appears to be a strengthening market. Yet you are also afraid that the market might reverse direction and you could then lose some of the profits you’ve already achieved. Selling call options against your stock enables you to participate in any future appreciation of your stock, and the profits generated from the option sale provides some protection if the market should change direction forcing you to exit your position. If the stock continues rising and hits the strike price at which you sold the calls, you are faced with two nice choices. Let the option holder call the option (exercise his right to buy the stock at the strike price you sold it for) or, roll out the options to a farther expiration and strike price once again allowing you to participate in further gains if the stock continues its upward trend. If you let your options be called you have gained not only the money from the option sale but also from the appreciation price of the stock at the time the option is called. But if you roll out the calls you could continue to stay in the game for a further appreciation in the value of your stocks. Of course there is always the potential of a market reversal and losing the potential for further appreciation. Even so you still have gained the premium money you obtained in the sale of the calls. If the market continues uptrending you can ride the appreciation wave by rolling out your positions several times up to and until you run out of future strike prices. By this time you would have gained substantial profits.

Now let’s see how the roll out benefits the naked option writer. When you sell a naked option, be it call or put, you theoretically face the risk of unlimited losses in your position due to the fact that if the underlying security moves against you the potential for loss is unlimited. The term “theoretical risk” is used here because this risk has been blown out of proportion and grossly exaggerated. While the potential risk of loss does exist it’s a negligible one if you employ appropriate strategies to defeat it. Please see another article on this subject entitled “Risk of ‘Unlimited Loses’ In Naked Option Selling Is A Myth” where it talks about this theoretical risk being totally controllable using proper defensive strategies. One of the defensive strategies mentioned in that article is the use of roll outs.

Here’s a scenario that may face an option writer. Let us suppose you sold naked puts several strikes out-of-the-money with expiration forty to sixty days away. Some time during its life the market turns against you and begins to drop down to the price level of the strike you sold. Many option traders would just close out the position buying back the puts at a higher price and taking a loss. You being the smart trader would roll out your puts by buying them back at the now higher price and at the same time sell new puts farther out in time and several strikes out-of-the-money at a higher price than you bought back your puts. You’ve just converted your original 40 or 60 day puts into longer expiration puts thereby avoiding taking a loss at this point in time. The process of closing and opening positions can be done as a spread trade and in this way you are paying reduced brokers commissions. If the market continues its downward trend you can also keep rolling out your positions repeatedly till you reach a point where there are no more available future options to roll out to. At this point your puts may be so far out in the future that even if it goes deep in the money chances of it being exercised are slim. There is an e-book written on this subject titled “Stock Options: The Greatest Wealth Building Tool Ever Invented” where the roll out process is described in much detail together with other protective strategies for naked option traders. The e-book contains numerous actual trading illustrations of the use of the roll out process. See this article’s author profile for more information.

If you are going to be an option trader or already are one, rolling out is a must strategy in many of your option trades. You will find the strategy highly rewarding and in many cases offers a wide variety of choices to your trading styles. Not only does it enable you to increase your trading profitability but more importantly it affords you the ability to protect your trade positions against certain adverse conditions. As this article is written today, we are in the midst of a financial crises as never seen in a long time. The stock market has now depreciated to panic lows with investors seeing the value of their investments evaporate into thin air. Yet for many option traders extensively using the roll out process they will weather the storm much better than others and they will certainly recover much faster when economic conditions turn for the better.

Let’s take a look and see what exactly is regarded as the ideal investment.

When asked to define what the ideal investment is investors have various versions of what they consider to be the ideal investment or the Holy Grail of Investments. In the ultimate analysis, with few exceptions, most investors feel that an ideal investment should provide the following qualities: safety of capital, consistent high returns, immunity from economic and market fluctuations and finally, liquidity, or availability of funds should the investor find an immediate need to tap his resources. Safety of capital and high returns seem to be the most desirable of all yet these two are totally opposing qualities in any investment. As the saying goes, the higher the risk, the greater the reward or inversely, the lower the risk the smaller the reward.

That said let’s explore our choices. Until the advent of options there appeared to be nothing that came even close to being called an ideal investment let alone be called the Holy Grail of Investments. We had to face the fact that investments were either low risk low reward or high risk high reward. Some investments were somewhere in the middle ground but few or none were in the Holy Grail category. Investors may be classified into two groups, passive and active investors. Passive investors prefer entrusting their capital to third parties and doing nothing more than expect returns from their investments either on a regular basis or value appreciation over time. They put their money into a fixed return instrument such as passbook savings accounts, money market funds, treasury bills, certificates of deposits, bonds and included in this lot are dividend paying stocks and mutual funds. Then there are the other passive investors that prefer to place funds into long term appreciation assets with capital growth as their main goal. Examples of these types of investments would be real estate, precious metals, arts and antiques. All these investment instruments while delivering small returns on a year-on-year basis do offer much safety of capital.

The active investor on the other hand is a more adventurous individual. He seeks high returns for his money, hopefully at reduced risk, by actively being involved in trading the markets, be it real estate, stocks, bonds, commodities, futures, foreign exchange, options or whatever else can be traded and made money on. Although more of a risk taker he nevertheless tries to moderate his risk exposure by restraining his profit objectives or rates of return on his capital. While passive investors are happy with annual returns of 6 to 10 percent, active investors seek higher rates of over 12 percent and more like in the region of 14 to 18 percent per annum. Is this doable? Yes, it is and many are happy actively trading the markets and achieving these returns using their own trading techniques that somewhat controls risk to an acceptable degree. Now here’s the shocker. Option traders are able to generate annual profits in excess of 20 percent without exposing themselves to any more risk that those achieving 14 percent. Now here is an even greater shocker. Among those that trade options the ones specializing on the selling side generate annual returns in excess of 30 percent with many averaging annual returns in the region of 40 to 50 percent without increasing the risk factor any more than the passive investor!

Foreign currency traders as well as commodities and futures traders sneeze at this claim saying that they can outshine the option seller in annual returns. True. But can they claim to do so at the same risk level as the passive investors? Most probably not.

Selling options (stocks, commodities, futures, etc) has become for many the Holy Grail of Investments. To the experienced option seller this trading strategy offers high, consistent returns, a fair degree of immunity against economic and market fluctuations, liquidity, and finally safety of capital. This last claim may be open to debate from non-believers in this trading strategy. To be fair let’s qualify the safety claim by saying that the inexperienced option seller is open to potentially heavy losses if he does not know what he is doing. But to the seasoned trader selling options is a safe investment strategy delivering all the qualities of an ideal investment to the point where successful option sellers claim to have found what to them is the closest one can ever get to the Holy Grail of Investments. Selling options on stocks, which is the specialty of this writer, can be particularly rewarding using a carefully planned trading system combined with disciplined money management and with proper safeguards in place. There are many trading strategies in selling options. Some are simple enough, like the covered call technique, delivering fairly decent returns while others are more complex but more rewarding. There is one option selling system developed by this writer that can be carried out as a long term investment program offering a fair degree of safety and delivering consistent high returns time after time. By using a carefully planned, three-pronged system of trading, the risks associated with selling options can easily be conquered.

This writer has mastered this three-pronged trading technique and anyone wishing more information may visit his web site at http://www.theoptionseller.com

While theoretically the selling of naked options carries with it the potential for unlimited loses, in the real world this so-called risk is controllable to such a large degree as to be meaningless. Thousands of option sellers are successfully making a good living and growing their capital doing nothing but sell naked options. The fact is, all these successful traders are employing certain safeguards or protective trading strategies that allow them to defeat this ‘unlimited risk’ factor.

Those who believe that naked option selling has the potential for ‘unlimited loses’ are obviously misguided in their belief. Selling or writing naked options when done in a disciplined manner coupled with proper protective trading techniques and sound money management is no riskier than buying options. Seasoned options traders who specialize in naked writing regard option buying as a riskier, more speculative trading strategy. Statistics show there are more traders who lose money as option buyers than option sellers.

Options are decaying assets. They lose value each day that the underlying stock to which they are attached remains unchanged or moves in a negative direction. The magnitude of daily losses depends on many factors but the primary one being the behavior of the underlying stock. An option buyer (versus an option seller) is faced with this dilemma and can only be a winner if he correctly determines the movement of the stock and the magnitude of the move. If the market moves in the opposite direction or if it does not move at all, the option buyer is a loser. The option buyer must not only correctly foretell market direction but his prediction must be accompanied by a major move in the market. A less than significant move will still result in a loss for the option buyer.

On the other hand, the option seller takes maximum advantage of the decaying characteristic of options. As an option seller he merely sits and waits for the option to lose value daily to the point of being worthless on expiration day. He does not need to correctly predict market direction to generate profits. If he sells puts, he is a winner if the stock stays flat, a winner if the stock goes up. He can only lose if the underlying drops far enough to hit past his strike price position. This means that even if the stock goes down he is still a winner if the move is not far enough to hit his strike position. If he is a call seller, he wins when the stock drops, stays flat or moves up less than significantly. Admittedly, during the validity period of the option until its expiration date, the option seller faces the potential threat that the underlying stock may move continuously against him past his strike position, in which case there would be no limit to his loses. But this can only happen if the seller is careless enough not to watch and monitor his position on a regular basis!

Options are not ‘buy and hold’ securities. All options traders, buyers and sellers alike, carefully watch their positions on a regular frequency. In their march towards expiration dates options are always in motion in tandem with their underlying stocks thereby continuously presenting opportunities for making profits or presenting danger signals for incurring losses. Option sellers are a more cautious lot than buyers and consequently sellers have developed various protective trading techniques to offset the so called ‘unlimited risk’ factor to the point where it is nearly a neglible risk. What are these trading techniques? Each option seller may have his own system but here are a few strategies that conquer the risk.

1.       First and foremost and probably the most important thing to consider when getting into selling options is the choice of securities. Highly volatile stocks are most susceptible to the highest risks because of their potential for making dramatic price moves up or down. While volatile stocks tend to offer attractive option premiums, this benefit can be cancelled by the higher risk of a major negative move. A price gap out in a stock can cause severe losses. Conservative option sellers who make a living or grow their wealth selling options will often tend to play ETFs (Exchange Traded Funds) or Indexes instead of stocks. These securities seldom undergo dramatic one day moves and it is even less vulnerable to price gap outs.

2.       Careful monitoring of position – As mentioned earlier, option sellers tend to be a cautious lot and anyone who sells options and does not watch the progress of his position can only be considered dumb or stupid. One does not need to be glued to his computer screen and watch every move in the stock market. He only needs a cursory look at the market now and then to see how things are developing. When a situation starts building up where one’s short position may be in danger, action can immediately be initiated before it degenerates into a bad situation. The option sold may be bought back immediately at a slight loss before it gravitates to bigger losses. This slight loss can be no more than what an option buyer would be exposed to in a similar negative scenario. And this is assuming the option seller does nothing more than buy back the losing position. But if his monitoring is combined with the other strategies illustrated below then the risk of loss is nearly nil.

3.        Use of stop losses – For the trader who does not have the time to occasionally watch the market he may use stop losses on his positions at the same time that he initiates the short positions. There is no need to explain here what a stop loss is as it is presumed anybody who is in the stock and options market knows what this is. Additionally, with the advent of online trading, electronic alerts can be initiated with brokers so that when a perilous situation starts developing an automatic alert signal is sent to the trader’s email, iphone, or cell phone.

4.       Use of credit spreads – Here again there is little need to explain what a credit spread is as once more it is assumed that options traders know what this strategy entails. This trading method coupled with careful monitoring and the use of the stop loss is enough to almost guarantee that the option trader will never be exposed to the fear of ‘unlimited loss’.

5.       Use of the roll-out feature of options – This is one strategy that is not being used to maximum advantage by many option sellers. Based on their personal trading experiences and extensive use of this feature those who have been using it swear by it as a powerful defensive strategy in preventing losses in option selling.

Strategy number 5 above is effective enough when used alone and by itself, but when combined with the other strategies above, the whole system becomes a formidable program that almost totally eliminates losses in option selling. One particular options seller has personally developed his own system of using a combination of all the above in his option trading activities and he says with much confidence that he sleeps very well at night thinking he will never ever be subjected to the so called risk of ‘unlimited losses’. He has written an e-book about his system and in it he describes in much detail the methodology he uses in overcoming the risk. Anyone interested may visit his web site at: http://www.theoptionseller.com

For those who are contemplating of getting into the option selling business, pay no heed to the naysayers. Next time you hear someone say “naked option selling is extremely risky due to the potential for unlimited losses” that person is most likely an option buyer who has never ventured into the lucrative field of option selling. His remark obviously comes from his ignorance of the inner workings of options and the various safeguards available to the option seller. To the knowledgeable option seller the risk of losing money is less than the risk facing the option buyer.

• to find an investment vehicle that would effectively preserve capital and minimize risk in the face of a fluctuating and constantly flexing economy

• the investment vehicle must provide better than decent yields in all economic conditions to promote constant growth of capital value.

With the stock market as the premiere choice due to its historical record of outperforming all other investments over time, people are increasingly turning to the stock market as their main investment vehicle for future capital growth. It is here where much higher rates of return can be made with a relatively small increase in risk to capital.

With thousands of books, manuals, internet sites, seminars and courses offering investment strategies and trading systems in the stock market and its derivatives, there are few, if any, that deliver the ideal investment vehicle sought by the long term investor in search of safety and high returns. Not only is there a near total absence of an ideal investment system but there are many that promise eye popping, mind boggling returns and, they are exactly that; mere promises.

Most of the trading systems offered are structured on strategies or activities that work when conditions are ideally suited to the program being peddled. Most of their successes are highly dependent on picking the right stocks at the right time. In other words you must be a good stock picker or use a stock picking service (for a high monthly fee) to select the right ones for you. Market timing is also an important factor in their systems. Again, you must be a good market timer or depend on a service that provides market timing signals (also for a high monthly fee). These supposedly high yield investment programs don’t say anything about how bad things can be when conditions go against their predictions. These programs do exactly as promised: great when the going is good but disastrous when the going is bad. Without doubt many have been taken by these so-called services and while an investor/trader may be successful for a while, the end result over a long period of time is always the same – no better than if you had done the selections yourself.

While there is no one investment system or vehicle that can be an answer-all to the various goals of various investors, there are some investment alternatives that can come close to satisfying the two basic needs of safety and decent returns. Diversified mutual funds have been touted as the answer to these basic needs. But over the years these funds have shown that during downturns in the economy they perform just as badly as the whole investment market in general. And, over the long term, many of these diversified funds have failed to even match market performance in general, much less outperform it.

Enter market derivatives with emphasis options.

Trading in stock options has become very popular with institutional investors as well as private individuals as a sound money management system supplementing their investment portfolios. The ability of stock options to give the investor a wide range of choices is what has made the options market grow considerably over the last two decades. To quote one options expert: “Stock options are the greatest wealth producing tool ever invented on this planet. . . . if you know how to use them”.

The key element of this statement is: . . . if you know how to use them.

For many people the mere mention of stock options, sends shivers up their spine. They look at options as synonymous with great risk. But isn’t driving a car very dangerous for one who doesn’t know how to drive? The ability of stock options to give the investor a wide range of choices in stock market investments is what has made the options market grow by leaps and bounds over the last twenty years. Statistics compiled by the Options Industry Council, a group that educates investors about options, show that volume in options trading has risen tremendously in recent years. Further, studies show that individual investors make up 60% of the market.

For the individual who has sufficient funds and is looking for more than a decent return on his capital and with controllable risk, stock options may be the answer.

There are dozens of option trading systems being employed by individual investors and institutions. Each system is designed to accomplish a specific investment goal. A financial institution may use long put options to hedge its winnings in stocks that have appreciated in value. Another investor may buy call options instead of stocks to enter a position in a security that has caught his fancy. Still another may sell calls against his stock holdings to generate income from his stock position, or what is popularly known as covered call writing.

Of the dozens of option trading systems there is one that can be carried out as a long term investment program offering a fair degree of safety and consistent high returns over time, thus satisfying the investor’s two basic needs of safety and return.

This is the selling of uncovered or naked options.

But wait! Is it not said that selling naked options carries the risk of unlimited losses? Isn’t this a contradiction?

Indeed selling naked options when done carelessly and without a disciplined strategic program is extremely risky!

But by using a carefully planned and disciplined system of trading, the so-called “unlimited risk” factor in selling options can easily be conquered. There is a three-pronged trading strategy being used by one successful options trader that is proving to be a consistent winner in all market conditions. It is a trading technique that couples naked option selling with a modified ratio credit spread and the use of the roll over feature. While naked option selling has acquired a bad rap of being highly risky, this three-pronged trading strategy allows the trader to defeat the risk. Not only is the system able to substantially reduce the risk, it also offers one the ability to become a savvy investor/trader without having to depend on picking the right stocks or timing the market.

It involves utilizing the system in any market condition using only one or a few stocks, ETFs or indexes (the latter two are more effective). One need not worry about finding the right stocks or timing the trades. The fact remains that stocks behave, more often than not, in crazy and irrational ways so that one can almost say that consistently choosing winning stocks is as good as a random walk down Wall Street. Rather than be proactive and try to predict and time the market, as many try to do, this three-pronged investment system is reactive. The prescribed trades are done in reaction to how the market has moved, not in anticipation of its future behavior.

This three-pronged trading system does not promise quick profits or mind boggling yields but steady annual returns in excess of 30%. Many are averaging returns of 50% to 60%. It would be prudent to say that in times of deep downturns the system may not deliver the promised returns but it will hold its own and will definitely outperform the market.

One options trader that has mastered this three-pronged trading technique has decided to share his knowledge of the system by writing an e-book on its methodology. Borrowing from that quote about options being a great wealth producing tool he has aptly titled his work: STOCK OPTIONS: THE GREATEST WEALTH BUILDING TOOL EVER INVENTED. In it he details the step by step methodology of this trading technique and gives an exhaustive series of sample trades covering several months of transactions. It shows the effectiveness of the system in an up market, down market and horizontal market using only one ETF stock. To this day the writer continues to use only one or two ETFs in all his options trades and he includes a web page that shows his current and actual trading results month by month on an ongoing frequency.