Everyone likes to win more than lose… and this tactic that can help you generate positive returns on 80% of your trades, so get used to winning.
Winning gives you confidence and helps you maintain your convictions, even when the price of an underlying stock initially moves against you.
Let’s look at this in closer detail and you’ll see what I mean…
Most Options Expire Worthless
There are many different options-trading strategies, but selling options gives you the best chance of winning.
Historically, 80% of the options transacted expire worthless. That means if you sell options, you’re likely to win 80% of the time.
There’s a lot of logic behind this phenomenon, but the main reason most options expire worthless is that they’re priced at a level that makes a payout unlikely.
To understand this you need to know that the price of an option is based on the probability that it will be in the money rather than whether a stock’s price climbs or falls.
Selling an option means that you provide to the buyer the right, but not the obligation, to purchase or sell a stock (or ETF) at a specific price on or before a certain date. For this right, you receive a premium, which is a fancy term for the price of the option.
The premium is calculated using a complex model, but what’s important for you to understand is that the premium is based on the likelihood that the option will be “in the money”.
To calculate this premium, the model uses an input called “implied volatility,” which is the market’s view of how much the underlying price of the stock will move during the course of year.
When implied volatility is high, the price of an option is rich—therefore, the premium of the option is elevated. When implied volatility is low, the value of an option is relatively low.
This might seem obvious, but as an options seller, you want to sell options when the premiums are relatively high.
It generally makes sense to sell options when implied volatility is high. Not only will selling options provide you with the opportunity to win more than you lose, but you can attain robust weekly or monthly income by selling options on stocks or ETFs at opportune times.
If you’re an investor looking for value and income, then selling options is a prudent strategy.
Although there are many ways to sell options, one of the most pervasive strategies is selling covered calls. This allows you to earn income while taking advantage of undervalued stocks.
A covered call means that you own a stock and are selling the right to call the stock away.
When you sell a covered call, you’re capping your upside to earn additional income from the premium you receive from the options buyer.
The additional income you receive will enhance your returns and provide you with some downside protection if the price of your stock declines.
Your downside protection will equal the premium you receive. For example, if you received $1 in premium, the stock price could fall $1 and you would break even.
If the price of the underlying stock climbs above the strike price of the call, your shares will likely be called away, allowing you to take profit at a higher level in addition to receiving your premium.
If the price of the stock remains below the call strike price, you’ll earn the additional income from the premium you receive and continue to own your stock.
Selling options not only provides you to with the opportunity to collect premiums, but also allows you to transact simple strategies on the premise that most options expire worthless.
By using options-selling strategies, it’ easy to consistently generate winning trades and meet your trading goals.