When you buy an option, you are hoping for a move in the stock based on a chart or event or your brother-in-law’s advice (bad move there). Hopefully, you watch the option move up and then — when greed, fear or satisfaction set in — you sell and make a profit. Or you watch it go down and either have an automatic stop loss in to sell it when it hits a certain level or, like most traders, you keep your fingers crossed and hope for the best … until the pain of losing on paper is greater than the fear of losing real money and you sell at a loss.
In a recent survey, results showed three out of four options traders still trade this way. Accordingly, the same survey showed that three out of four options expired without being exercised or with any value. And yet, the traders who took the “sell” side of the trade put money in their pocket on Day One of their trades, every single time.
Selling is a low-risk option strategy and a low-risk way to generate high monthly income and a great entry point to purchase stock at a lower price.
Here are several things to consider:
When you sell an option, you are collecting the cash up-front. You are already ahead.
When you sell an option, you are transferring risk to the buyer. Yes, when you sell options, you assume some risk but not to your capital.
This cash you collect upfront gives you the ability to manage the position – you have cash in hand to “close” or buy back the put or call, at a profit or loss, without using any or a good deal more capital. This enables you to conserve capital, the basis for regular monthly income.
And accepting cash enables you to create targets for your positions. The sum of these targets, when set properly, gives you a target income for the month … and that is what this is all about.
And selling puts let’s you decide the entry price when buying stock. For example, you can sell a put to purchase a stock that you will sell covered calls against when it is put to you. Then, you sell monthly calls until the stock is called away. Then, back to selling monthly puts to re-enter the stock. Rinse and repeat! Over and over in the stocks that you want to generate monthly income.
Selling puts is actually a bullish tool. The advantage to selling puts over buying calls is evident in the math: The odds of winning are significantly increased. Many professional traders use the short put strategy to buy stocks at prices they want. Nobody wants to pay the highest prices to own shares, but when the stocks pull back – and stocks always pull back – the market helps you to get in at a better price.
But what if you don’t want to buy the stock? Don’t sell puts on stocks you wouldn’t want in your portfolio. You will get taken out of the trade if the buyer wants to exercise their rights (to “put” stock to you at the option’s strike price), and those are the kind of stocks you probably want to own!
This is always the risk with short puts, but it’s hard to call it a “downside” when you end up owning a good stock at a great price. Besides, even if you are assigned to take possession of the shares, you can always sell them on the open market. In fact, you can often get out for a better price and, thus, a profit … and repeat the strategy, if you choose. Better yet, if the stock goes up and your put gets assigned, just sell a covered call against the shares and you’ve just established a new position in your portfolio — and another way to profit!
We are focused on generating consistent monthly income by selling options for premium using low risk strategies. You can get FREE trades at getrichinvestments.com
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