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Unlock the Power of Options Selling: Your Quick Guide to Profits
Why & How I Enter Spreads – As Requested!
BullTradeFinder
November 11, 2024
Hello, Traders!
Options selling is a strategy that offers consistent, controlled gains by turning time decay and probabilities in your favor. Here’s a breakdown of core options-selling concepts and strategies you can apply right away.
Check out today’s video on why and how I enter spreads, based on your requests: https://www.youtube.com/watch?v=XFGsajhK_Tg&feature=youtu.be
📉 Why Sell Options Instead of Buy?
Most options expire worthless, which means options sellers have an edge. By selling options, you can earn premium income with a higher probability of profit, even if the stock doesn’t make big moves. Here are some go-to options-selling strategies:
Covered Calls: Earn premium by selling calls on stocks you own.
Cash-Secured Puts: Collect premium while setting yourself up to buy stocks you like at a discount.
Credit Spreads: Define risk with limited reward, great for volatile stocks or when you have a directional bias.
Example: Sell a $100 put for $2 premium. If the stock stays above $100, you keep the $200. If it dips below $100, you buy the stock at an effective discount.
⏳ Time Decay: The Options Seller’s Best Friend
When you sell options, time is on your side. Known as Theta, time decay accelerates as expiration nears, which benefits sellers. This means that you can often profit even if the stock doesn’t move.
Optimal Range: Sell options with 30-45 days to expiration for an ideal balance of time decay and risk.
Example: Sell a 30-day $50 put for $1. By day 20, if the stock remains near $50, the premium could shrink to $0.30, letting you keep 70% profit from time decay alone.
📊 Credit Spreads: Limiting Risk with Defined Outcomes
Credit spreads let you sell options while capping both potential gains and losses. You sell one option and buy another further out-of-the-money, giving you a controlled, defined-risk setup.
Example: Sell a $100 call and buy a $105 call for a $1 credit. If the stock stays below $100, you keep the premium. If it rises above $100, your max loss is capped at $4.
🔢 Probability of Profit (POP): Make Time and Probabilities Work for You
When you sell options further out of the money, your Probability of Profit (POP) increases, though your premium is lower. Balancing high POP trades with appropriate risk sizing helps create a reliable strategy.
Example: Selling a put with a 70% POP on a $50 stock means a 70% likelihood of keeping the premium, earning around $0.50 per contract.
🛡️ Cash-Secured Puts: Buy Stocks at a Discount
Cash-Secured Puts allow you to get paid to buy stocks at a lower price. If the stock hits your strike, you’re buying at an effective discount.
Example: Sell a $50 put for $1 on a stock you want to own. If the stock drops to $50, you’re buying at an effective cost of $49 after collecting the premium.
🔄 Rolling Options: Adjust for Profit or Control Risk
Rolling gives you flexibility to adjust positions by extending or altering expiration or strike prices.
Example: Sold a $100 put that’s now in-the-money? Roll it to a $95 put for next month to allow more time and adjust your breakeven.
Each of these strategies offers different ways to create consistent income, manage risk, and apply options-selling principles effectively.
Happy Trading,
The Financial Bit Team
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