If you buy an option, there’s a 90% chance it will expire worthless - therefore, the person who sold the option to you has a 90% chance of success.
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.