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Option Strategies: Don't Buy And Sell Shares, Write Options Instead

Ramy Taraboulsi, CFA profile picture
Ramy Taraboulsi, CFA


  • Buying and selling stocks can be replaced with option writing.
  • This strategy applies only to certain companies with specific criteria.
  • Whether the options are written in the money or out of the money depends primarily on the stock trend and whether the stock is overvalued or undervalued.
  • A portfolio of written options creates an efficient frontier that is much better than a portfolio of diversified stocks (lower risks and higher returns).

This article was amended on 11/27/2020 to fix a typo in the section discussing actionable suggestions.

What was the impetus for writing this article?

Over the last five years, I significantly increased my trading activity as I sold my company and started heading towards retirement. The marketable securities asset allocation that I set up for myself was 70% to corporate bonds, while keeping about 20% invested in large-cap mature companies and about 10% in high-risk equities; I did not say "small cap," as some of the stocks that I invested in had a large cap, but high risk/volatility, for example, Zoom (ZM).

Within the first year, my equity portion (the 30%) dropped significantly as I shifted from buying and shorting stocks to writing options instead. In other words, I closed a big part of my stock positions, coincidentally, by writing covered options on them and letting the options be assigned. I used the assignment proceeds in buying more fixed-income securities, and restricted my trading activity to writing call and put options.

Despite the fluctuations in the stock market, the return on investment of my portfolio beat the major indices by a healthy margin; I was comparing the portfolio primarily against the S&P 500 (SPX). At the same time, the overall volatility of my portfolio was much lower than the volatility of all the major indices by a healthy margin a well.

As part of my series about option strategies articles, I decided to share this strategy here. The article is written to focus on the practical aspect of writing options versus buying and selling/shorting shares, rather than addressing the academic theory and mathematical formulae behind the strategy.

Source: Quantra, Option Payoff

Thesis and Outline of the Article

The options strategy presented here is based on replacing buying new stocks and

This article was written by

Ramy Taraboulsi, CFA profile picture
Managing Director and CEO, VeritableSoft Innovations Inc. ​Ramy is responsible for all the day-to-day operations of VeritableSoft, in addition to setting up the strategic direction of the company as a board member. ​Prior to working in VeritableSoft, Ramy held different executive positions including Chairman and CEO at SyncBASE, CIO at Insurance Bureau of Canada, VP - Internet Strategy and Development at Fidelity Investments, VP - Internet Strategy at Merill Lynch and Chief Systems Architect at Mercer Human Resources Consulting. Ramy has also held various directorship positions, and he is currently a director of AlphaOmega Reno Construction Inc., Canadian Wado Ryu Karate Do Federation and ESOP Association Canada. In addition to being the Chairman and CEO of VeritableSoft Innovations, Ramy also teaches business at both Seneca College and Schulich School of Business, York University. ​Ramy is a Professional Engineer who holds an M.Sc. in Computer Science, MBA and he is a Chartered Financial Analyst (CFA). Ramy has been practicing different forms of martial arts for 40 years, and is currently actively practicing Karate and Tai Chi. He also plays music and enjoys reading, writing and traveling around the world.

Analyst’s Disclosure: I am/we are long ZM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (135)

larryklein profile picture
what online tool do you recommend:
I want to quickly see the various calls and puts for an indicated security and have the software tell me the specific put or call that has the best return and lowest chance of exercise
Ramy Taraboulsi, CFA profile picture
@larryklein Seeking Alpha Premium has some good features. However, I am using TD, and look at the specific options with the highest volatility for a specific stock that I deemed underpriced to write put options on. I never let the volatility select the stock, and always start with fundamental analysis on the stock.
larryklein profile picture
@Ramy Taraboulsi, CFA since 90% of a stock's performance is correlated with the market in the short run, if you have 5 positions on which you have written puts, then they all "go south" during a market decline and you have either been put the shares in all positions or buy back the puts at a loss. Is this correct?
@larryklein You asked,
"if you have 5 positions on which you have written puts, then they all "go south" during a market decline and you have either been put the shares in all positions or buy back the puts at a loss. Is this correct?"

You listed two, out of three possible choices.
1) Take assignment, where the current stock price is lower than what you paid for the shares.
2) Buy back the puts at a loss.

But there is a third choice.
My favorite choice is,
3) Roll the same put strike, or down one strike, and out to a farther expiration, to earn a net credit, and avoid assignment.

(Buy to close the expiring put for a loss, and simultaneously sell to open a new put, either at the same strike price, (if the stock price is slightly in the money), or one strike price down, (if the stock price is deep in the money), and out far enough in expiration to earn a credit that is LARGER than the cost of buying to close the expiring put. This results in a net credit.

I consider rolling down one strike, as a repair strategy, and do not look for a large net credit. I am looking to avoid assignment. I am looking to earn a small net credit, and extend the expiration duration as little as possible.)

If the put is still in the money by expiration day, roll the put again, down one strike, and out to a farther expiration, to earn a net credit, and avoid assignment, and extend the duration of the expiration date. Eventually, the put strike will be brought down to the stocks current market price, and will eventually expire out of the money. You keep all the accumulated net credits as profit.

Rolling down one strike price at a time, accomplishes three objectives.
1) Avoid assignment of a deep in the money put. This benefit should be obvious.
2) Earn a small profit that is credited into your account immediately, but does not count as taxable income, until the put is closed by expiring worthless, or you buy to close the put for less money than you sold it for.
3) Each time you roll the strike price down, you are reducing your capital at risk, AND, you are bringing the strike price closer to at the money premiums, which become more profitable.

There is a bonus benefit.
4) You have the opportunity to have your put strikes follow the stocks falling prices down to their bottom low, where you can then choose to let the put expire at, or near the stocks new low.
Get PAID to buy the stock near it's low.

A rolling put gathers no loss.
Knowledge IS power, ONLY if you apply that knowledge.
Thank you for the great article.
Have a question ( it may sound silly).
I have sold a covered call on XOM ( Exxon mobil ) - and I own the shares of the company hence the covered call.
I know the 2 boxes that explain - "Action on existing position" is applicable here.
Do I use the box for Short position or long position. ( I know it sounds basic)- but I am trying to figure out if I am short or long on my Exxon mobil stock and the covered call option I have sold on it.
I think I am short as I have sold a call . Am I correct.
Ramy Taraboulsi, CFA profile picture
@Tennislover , if you hold the shares and sold calls, which are now in the money, you are neither short or long. If the options are "out of the money" then you are long with the existing shares. If you don't have the shares and just wrote the options then you are short.

Seems that your options are now in the money. Usually, I do one of two things: If I believe that the stock will further go up, I roll over the options. If I believe that the stock has taken its run then I let the option be assigned and we have another fork: If I want to maintain a position, I write a put option. If I no longer want a position, I do nothing.

Please let me know if this answers your question.

@Ramy Taraboulsi, CFA
It does answer my question, I did not know that there was a position where you are neither long or short. But it does make sense. So is it fair to assume short position always means you are in a position that you owe someone something that you do not have whether it is cash or stocks ? Or does short position have other definitions as well. I like the detailed explanation of the position you are in , rather than saying long or short. Thanks again for your insight, explanation.
Ramy Taraboulsi, CFA profile picture
@Tennislover A short position means that the value of your holdings will drop when the stock price goes up. When you have deep in the money covered calls, the increase in the stock price will have a very small effect on the position of your portfolio, implying that you are neither long nor short.

This is a simplified definition of a "short position".
We make a comfortable living doing just what you are doing. In our case, are totally out of bonds, and only 28% in stocks on 27 positions, at this point. Our equity portfolio was mostly achieved through writing puts on stocks we wanted to own anyway. So, we can either live off of the income from writing the option or use it to effectively reduce our average cost on the stock if assigned...win-win! We, too, write calls when positions get lofty in price and create a profit and use that capital for further options profits.
We are sometimes baffled why some of these high-yield authors are "giddy" when they recommend and buy a stock with an 9% yield. Selling a put option, or a strangle or straddle on the stock can easily create a conservative (very low risk option) of 15-30% annualized return or a huge discount on the underlying. One does not have to trade options in a risky way.
Trading options is not for those who have a tendency toward addiction, either to drugs or adrenaline. It requires great discipline, patience and a system to do well repeatedly. If one is not able to put a a good deal of time into options training, then it is best to not pursue it casually.
Another thing, we never buy options. We are sellers of options...we are the casino, not the gambler. It is a business for us and over 1,000 trades later, has provided a nice living
No day trading, and no margin...safe, conservative, dependable.
Ramy Taraboulsi, CFA profile picture
@WCM Investments
"no margin"? I am not entirely sure about that. Maybe no interest, but your margin is certainly consumed out of writing put options.

Thanks for your comment. It 100% reflects my conviction...
31October profile picture
I have learned that no matter what I do, I will be WRONG, but I use options to make money by being wrong. I sell an inverted strangle, with the put side ITM for this Friday and a *lower* strike price deep ITM call for the following week. High-priced shares to be put to me this Friday, then shares will be assigned and called away at a lower price the following Friday. Repeat bi-weekly. I lose money on every share but make more on every contract, leading to less risky returns.
Example: Sell PLUG $17.50 May 20 put + $12.50 May 27 call for $542 in total premiums. ($542 premiums -$1750 put assigned + 1250 call assigned = $31 profit) That is about 44% annualized yield.
There are of course risks to any strategy, but I like this one for the consistent returns and low impact on margin.
@WCM Investments We have a lot in common, on our view of selling CSP's.
BUYING options, is gambling.
SELLING CSP's, is like being the CASINO.
Over the long term, the HOUSE, ALWAYS wins.
Be the CASINO.

Especially if you know how to roll ITM puts, out to a farther expiration,
OR, down one strike price, and out to a farther expiration, out far enough, to earn a net credit.
(NET CREDIT=Buy to close the expiring ITM PUT at a loss, and simultaneously, sell to open a new PUT with a farther out expiration, for a credit that is LARGER than the loss of buying back the old put.)
You (almost) never have to take assignment on a deep ITM put.
On the rare occasions that I have had shares "put" to me, because of early assignment, I used the "share/put swap" strategy, to return my position back to a ITM put position, AND earned a few dollars in the process.

This has worked out soo well for me, that I sold off all my dividend, and growth stocks, and now stay in cash, to use as collateral to sell CSP's.

I no longer use margin either. Good thing too. The recent market has brought ALL my puts deep ITM.
So what if my account value is only equal to 60% of the cash in the account.
As I roll the strike prices down one strike price at each expiration, OR, as the market recovers, the drawdown from the ITM puts will shrink.

During these bad times, I still roll my deep in the money puts, as they are about to expire, to avoid assignment, and to earn net credits, (more cash flow), and earn more ROI than the average dividend stock.

Then, when my puts strikes are ATM again, the premiums will be HUGE, again.

If I had kept my dividend stocks, and NOT sold puts instead, my account value would STILL be deep in the red, but with no cash in the account, and who knows if the div's will be cut or halted during these tough times we live in.

"No day trading, and no margin...safe, conservative, dependable."

Most stock investors just can't wrap their heads around just how true your statement is, regarding selling CASH secured puts.

A rolling put, gathers no loss.
Make good choices
RedRock Asset Management GmbH profile picture
@Ramy Taraboulsi, CFA I wan going through your criteria for stock selection and I have some doubts.
you mention, among others:
1) The company has a high volatility (higher than 60%, and the higher the better).
2) When writing put options, the company should not be distributing dividends, or should be distributing minimal dividends (yield less than 1%).
3) When writing call options, companies that distribute dividends provide a lower risk and should be considered.

so I was wondering, especially in regards to the strategies applicable when you do not own the stock.
Say that I identify a stock that is undervalued and is on a current downtrend (like Pepsi). I like it but it has a IV of 22% and pays a dividend of more than 3%. Based on your chart, I should sell a PUT OTM, but this goes against your criteria number 1 and 2 above, for stock selection. Could you please explain better? Thanks a lot
Ramy Taraboulsi, CFA profile picture
@Saviolino , great question and thanks for commenting.

Let me first start by saying that option strategies are not suitable for every situation.

To illustrate, let me take the case case of Pepsi: seems that buying the stock directly seems to be a better choice than writing options.

I would not advocate writing options for Pepsi for two reasons: The volatility is low and it distributes relatively high dividends. These two factors make the premiums very low, and as a result, the return on investment would not be as high as buying the stock directly.

Please let me know if this answers your question and thanks again.
Ashland Heights Investments profile picture
@Ramy Taraboulsi, CFA You highlight kind of the conundrum of Options. The underlying needs to be high volatility, which implies low volume/Mkt Cap of shares, but also liquid enough to have high volume of Options, in addition to low dividends, etc. It's a rare case that all requirements are satisfied--but they do exist.
RedRock Asset Management GmbH profile picture
@Ramy Taraboulsi, CFA yes, it makes sense. Thanks for your answer. I just finished your book, and I wonder why my parents in love never gave me those piece of advice :)
Ashland Heights Investments profile picture
I just came across this post on Twitter which has tables of Real Volatility vs. Impl Vol of various ETF's. Interesting concept. He programmed it from IB's API:
Ramy Taraboulsi, CFA profile picture
@Ashland Heights Investments Very interesting. TD Waterhouse gives me historical for any stock for 20 days; it would be nice to see the implied volatility against the historical volatility as part of the option chain for each option, where the historical volatility is for a period equal to the term of the option.

Do you know the twimg link is for which option term?

Thanks for posting the link.
Ashland Heights Investments profile picture
@Ramy Taraboulsi, CFA I believe he mentioned it is 30-day term.
RedRock Asset Management GmbH profile picture

Dear Ramy, I will try to take advantage of your knowledge and understand better the concept of rolling. I will use an easy example of a strategy that I do understand.

Say that there is a stock I would like to have, which is undervalued and currently in uptrend. You want to earn an income with the Premium and, if mistaken (meaning the option expires ITM), end up with the stock (you wanted in the first place, so no big deal). I will use a real example of a stock I want (VOW)

So the stock today is at a PRICE = 189, I sell a PUT ITM with a STRIKE = 220 (deep ITM), and collect a PREMIUM = 30,40. My breakeven would be STR – PREM = 189,60.

First, easy scenario, is when the final price at expiry date is above the Strike, hence the option expires and I get the premium and not the stock.

Second case is when, close to expiry date, the stock price is in the range between 0 & 220, meaning the buyer will exercise the right to sell at 220 and I will have the stock. Now I could have 2 scenarios:

1) The price is between 189,6 & 200 = the option contract closes with a gain for me

2) The price is below 189,6 = the contract closes with a loss

For the case 1) I have the chance to roll the contract and repeat the entire process, and do that again, until one day the final price will be above my strike and the option expires. This means that the uptrend continues, so I must check that the price does not reach a value for which the stock in no longer undervalued

For the case 2) now the trend in no longer UP, meaning that I can either think:

A) It is temporary, the stock will go up again, I keep the stock

B) There is an inversion of trend, now is at 185, will go lower. I do not want to close with a loss, I must roll the contract, making it a PUT OTM? So close the first option buy buying back the initial PUT and sell a PUT say at 180

I hope you can bring some light on these whole “case-study”

Ramy Taraboulsi, CFA profile picture

@Saviolino, your case study makes good sense. The only thing that I would suggest is that you should close your position only if your fundamental analysis indicates that the stock is overpriced. As long as it is underpriced, you should continue rolling it forward (if it is assigned) regardless of whether you are profiting or not. As a result, you might be able to simplify the process a bit from what you described above.

Hope this helps.
@Saviolino and Attn: Ramy Taraboulsi, CFA
This looks like a bad trade to me. IMHO.
The strike is $220. The current stock price is $189. The difference between $220 and $189 is $31, But you only get $30.40 premium?
What happened to the intrinsic value?
What happened to the extrinsic value?

You don't mention the expiration date of the itm put option, but shouldn't the premium collected be MORE than the $31 difference between the strike price and the current stock price, when the itm put was sold? Shouldn't your breakeven be BELOW $189?

Looks like you got skunked by the bid/ask spread on the put.
As soon as you made this trade, the stock price is already below your $189.60 cost basis, and you start off in a loosing trade.

I sell a lot of otm cash secured puts, so I am only selling extrinsic value as premium, so maybe I'm missing something. If I sell a put with an otm strike of $185, and collect $1 premium, then my breakeven, if assigned, is $184
Ramy Taraboulsi, CFA profile picture
@Make good choices Thanks for your comment; your argument makes sense.

@Saviolino how did you get a premium less than $31 (unless it is the week of the expiry where the market maker puts bids and asks around the intrinsic value for low volatility stocks). Am I missing something here?
RedRock Asset Management GmbH profile picture

Dear Ramy, thank you very much for this article. I have read it several times and yet I do not understand it very well. It will be due to the fact that I am Italian and do not clearly understand everything ot that I am a newbie in this topic (options) or both. Hence some questions that, I hope, you will have the patience to read and answer:

1) In the quadrant inherent NOT having a stock, you mention that if is OVER & UP-trend you should write a CALL OTM. Basically you are shorting the stock, but who would ever short something that is on an uptrend. Expensive can become more expensive and overvalued more overvalued. So if I am not mistaken and selling a call OTM means that the Strike price (say 200) is far above the current price (say 180), if the price goes up and goes beyond the strike (say arrives at 210 at expiry date), the buyer will call his right to have me sell and I will be forced to buy at 210 and sell at 200. Wouldn´t it be better to chase the trend but not to risk to own the stock in the end? Basically I suggest to sell a put OTM (say with a strike at 170), so that if price continues its trend, I take the premium and not the stock.

2) Similar to above, I do not understand, in the same quadrant, why you do not short a stock that is UNDER & DOWN-trend. In fact you suggest to write a PUT OTM, saying that you do want to minimize the risk of ending ITM. But if price falls (was 200, bought a PUT with Strike of 180) to 170, you will be ITM and will receive a stock that you do not want. Who wants a stock that is on DOWN-trend, even though undervalued? Basically you are betting against the trend that, for my very little knowledge and experience, you should never do. The first thing I have been thought is that you buy on uptrend and sell on downtrend. So why not writing a CALL OTM (say at a strike of 210).

The quadrant inherent “how to manage a short position” almost drove me crazy :)

I still do not get why someone would decide to short something that is on Uptrend, hence I do not understand both the upper quadrants of that topic.

Finally the quadrant inherent “how to manage a long position” I do not understand why you write a CALL OTM. Basically you are exposing yourself to the risk of shorting something (low risk, being OTM, but still risk). If price hits the strike you lose a stock that is undervalued and has momentum. Why don´t you buy more? Selling a PUT ITM for example?

Please forgive me for not being concise but this entire topic (options) is tough for me

Thanks, Michele
Ramy Taraboulsi, CFA profile picture

@Saviolino, I see exactly where you are coming from.

One of the popular approaches in the market is "follow the trend". I personally never subscribed to this approach over the last 30+ years of investing. While in some situations it resulted in short term losses, on the long term, relying on the valuation and going against the trend, always resulted in healthy gains.

Let me explain with an example: Assume that you look at a stock, and your fundamental analysis (adjusting the financials based on the latest news, mark-to-market the assets, estimate the WACC and growth, and calculate the estimated discounted cash flow) indicated that the stock is highly over-priced.

However, the stock is on an up-trend; the current "mindset" of investors, most of which have yet to experience a bear market, is to buy the stock hoping that a bigger fool will buy it back from them at a higher price.

But you are different: This uptrend, based on your analysis would NOT continue for an extended period of time, and eventually there will not be enough fools to buy the stock back at a higher price. Trying to time the market to write the call option at the peak is a virtual impossibility, so the approach that you write call options out of the money.

If the trend continues, and the stock is about to be assigned, you would roll it over to a future date, at a higher price, and make a small amount of cash while doing that. You would continue doing that as long as my fundamental analysis indicates that the stock is over-priced. Eventually it will drop and the options would expire worthless. Of course, the risk

Michele, this is what I have been doing, and many years of experience confirmed that this conservative approach to shorting does work.

Please let me know if this helps.
RedRock Asset Management GmbH profile picture

@Ramy Taraboulsi, CFA that helps a lot. Finally an author that answers to people who raise questions, explains clearly and make himself understood. you´ve got a new follower, 100%

Ashland Heights Investments profile picture
Options Pair Trade Idea--

TELL Short Call 4/19/21 2.5 strike 0.15 premium 160% IV (shares at $1.5)

GLOG Long Call 5/21/21 5.0 strike 1.15 premium 60% IV (shares at $5.4)

Use the income on the short to pay for the long.
Ramy Taraboulsi, CFA profile picture
Don't know @Ashland Heights Investments about shorting Tesla; Looking today at what Mobileye is doing (out of CES-2021 Intel Keynote Presentation), I can see how more advanced Tesla is. Shorting Tesla is playing with fire.

My personal prediction is that within 10-15 years, 50% of the world cars will come from Tesla.
Godspeed Trader profile picture
** If you want to buy a new stock => Sell naked put option instead

I don't understand.

I want to buy ZM stock let's say at $500 (because i think it will go up to $1000)

so i proceed to 'sell the right to sell ZM shares at $500', become an insurer myself

who will buy my naked put?

If it goes up to $1000, i miss the boat

and my naked put is out of money because nobody is going to exercise that $500 when ZM is already $1000

I do, however, collect a premium on my naked put.

What am i missing here?

seriously an option noob =/
Ashland Heights Investments profile picture
Sell a Put that is already in the money (for the buyer). It will likely be exercised, but not a sure thing.
Ramy Taraboulsi, CFA profile picture
Hi Alex,

What you are missing here is that there is a "market maker" for options, not really an investor, but someone who is willing to buy the options at a price slightly lower than the mathematical option valuation (Black-Scholes model, for example) and ready to sell the shares at a price slightly higher than the mathematical options valuation.

With the presence of the "market maker" you do not need to find a matching party like we normally do in actively traded stocks.

And, yes, if the stock becomes a runaway stock, you will miss the boat, unless you continue rolling it over to future dates, assuming that you have enough margin to do that.

Please let me know if I answered your questions.
Thank you. Exceptional article. One of the best I've ever read on Seeking Alpha. Five stars easily.
Ashland Heights Investments profile picture
@Ramy Taraboulsi, CFA do you know of a place where you can sort all market Options according to I.V. (i.e. highest to lowest)?
Ramy Taraboulsi, CFA profile picture
I am not aware of such a site. If you find it, please let me know.

Having said that, I think I would primarily use it for pointing me to new companies that deserve studying.
Ashland Heights Investments profile picture
Agreed, it would be useful also perhaps for comparing IV's of similar companies/strikes side-by-side.

Probably, you'd have to code an API to do these.

In essence, if you're shorting calls, you're looking for the IV's that are over-valued. Meaning the quoted IV is greater than your calculation of "intrinsic" IV. Conversely, if you're a buyer, you want to buy volatility for cheap and sell it higher.

Nearly finished with your book.

Great thread here.
Nick Mumford profile picture

@Ashland Heights Investments In Interactive Brokers TWS system you can scan stocks with an implied vol filter. Not perfect but a useful screening tool.

Raymond W L Lee profile picture
As much as this article is relatively thorough compared with others I have read, I would still strongly advise anyone who are considering employing options within their portfolio to go through some serious education. This may include courses, online videos and articles, or even time to observe how price of options move with the underlying security. The hidden dangers that most retail investors encounter when employing options include leverage, convexity and lack of awareness on the option greeks. This article does a good job but there is only so much one can learn from a single article. I would say there are plenty of free resources in the open internet so on the theory side it should cost precious little.
Ashland Heights Investments profile picture
@Ramy Taraboulsi, CFA to that point, any good books on Options that you recommend?
Ramy Taraboulsi, CFA profile picture
@Ashland Heights Investments , I have written a book about options investing about 20 years ago, and I am providing a link to the book near the end of the article. The examples in the book may be old, but the principles have not changed. Have you had the chance to review it?

Personally, I would suggest attending lectures about options investing on YouTube. There are tons of them, but most of them are not deep enough.
Greg_Maryland profile picture
FWIW, I got a lot out of Options for the Beginner and Beyond by W. Edward Olmstead. The author is a math professor at Northwestern and is writing style I found easy to understand.
@Ramy Taraboulsi, CFA errata:

> Writing options (the transactions on the right) are less risky than the transactions on the left

I see now on the first pucture that writing options are in the lower half, not the left one.
Ramy Taraboulsi, CFA profile picture
@Denis Trofimov , thanks for your comment.

Yes, you are right when it comes to the picture. My statement was however referring to the list of the transactions just above it rather than the diagram, specifically:

** If you want to buy a new stock => Sell naked put option instead

** If you want to cover a short position => Write covered put option instead

** If you want to short a new stock => Write call option instead

** If you want to sell an existing stock position => Write covered call option instead

Please let me know if this addresses your comment.

Thanks again.
Hi @Ramy Taraboulsi, CFA ! Thanks for a clarification.

My eyes got attracted to a picture above.

PS. The trade MOEX in Russia is trading "marginal" options, when the writer don't receive a 100% premium debit to her account but instaed starts with zero (0) and get debit slowly "drop by drop" at each daily trade clearing session. I guess each day I as a write got to receive a time value won if theta is positive.

This way the trade outsmarts traders giving no premium to invest in fixed income securities.
Emma2013 profile picture
@Ramy Taraboulsi, CFA re: "The company has a high volatility (higher than 60%, and the higher the better)." Where do you find this statistic? That is different than the IV for a specific contract, correct?
Ramy Taraboulsi, CFA profile picture
@Emma2013 , good question. Let me try to answer it.

First, I am talking about the implied volatility, not the historical volatility. The historical volatility is practically irrelevant as it does not get used in the calculation of the option premium.

Now, you are raising an important point: If the implied volatility is much higher than the historical volatility, then it would be an indicator that writing options would be the right thing. There are many other issues associated with the volatility including the volatility smile for both the term and the strike price and which historical volatility needs to be considered. This may be the topic of another article.

As for the 60%, it is based on my own personal experience and you can consider it a rule of thumb. I don't have any references for it.
jf31 profile picture
06 Nov. 2020
I like to write cash secured puts on nvidia stock. It is very volatile so I usually go with a 15 delta. I can get $10 a contract at that level which is about 1% a month return on my money. This way I get a good return on my cash, I’m more than willing to pick up nvidia in a steep sell off. I repeat this process with Microsoft, apple, Facebook, etc. good premiums and these stocks get a good bid on small sell offs.
Owen213 profile picture
thanks for the article, just starting out in investing and options, that was a fascinating read
Retired Investor profile picture
@Owen213 You might appreciate my article explaining the data available for option traders. seekingalpha.com/...
Ramy Taraboulsi, CFA profile picture
@Retired Investor , looks like a very good article (and deep one too). I like these types of articles. It requires time to study and I put it on my list of articles to read over the weekend. Thanks for sharing...
Ashland Heights Investments profile picture
"When writing put options, the company should not be distributing dividends, or should be distributing minimal dividends (yield less than 1%)."

Why is this @Ramy Taraboulsi, CFA ? Is it just that you miss out on the dividend before expiration or is there something more complex going on that makes dividend-paying stocks not worth to write-puts?
Ramy Taraboulsi, CFA profile picture
Very good question @Ashland Heights Investments .

There are two reasons:

(1) Once the dividend is distributed, the value of the stock drops by the amount of the dividend, and the value of the put option would increase by this amount increasing the risk for the investor.

(2) The option valuation is inversely proportional with the distribution of the stock. The higher the dividend, the lower is the time value of money of the options. While this might sound counter-intuitive for put options, it is true primarily because of the call-put parity.

Please let me know if this answers your question.
Ashland Heights Investments profile picture
Makes sense. Maybe this is oversimplifying, but you could adjust the premium income downward by the amount of cum. div's until expiry.

This becomes the "true" income.
Ramy Taraboulsi, CFA profile picture
@Ashland Heights Investments , I don't think it is "true income"; It would be recorded as capital gains which is more advantageous from a taxation perspective.
Emma2013 profile picture
Hello Ramy,

Thank you for the article AND the free book - that is generous of you to offer it for free.

I have some limited experience with selling put options to acquire stocks I want to own at a discount so deciding on the strike price has been relatively easy - I never paid attention or bothered to learn about greeks, IV etc - I just decided on the max I was willing to pay, picked the closest monthly expiration & either got assigned or pocketed the premium and rinse/repeat.

Now I want to try writing puts for income & have identified a stock with price trending strongly upward. Does the put writing strategy you describe work well with weeklies? Also would you roll the option if close to getting assigned on expiration?
Ramy Taraboulsi, CFA profile picture
@Emma2013 , that for your comment and kind words. You seem to be doing the right thing with your approach.

The weekly options are really not different from the monthly ones. When I select a particular term, I don't take into consideration the weeklies versus monthlies. The challenge is that if it is deep in the money you may not find the strike price in the weeklies and you may need to go to the monthlies.

Yes, I normally do roll the option if it is getting close to be assigned. The timing for the roll out is tricking. If it is deep in the money, I tend to roll it over to a future date a few days before the expiry date.

Please let me know if this answers your questions.
grasul_x profile picture
@Ramy Taraboulsi, CFA "When to let a written option get assigned versus rolling it over to a future date is a complex decision and may be the topic of another article." Please can you post this article ASAP? :)
Ramy Taraboulsi, CFA profile picture
o.k. @grasul_x . It would be my article after next; I tend to alternate between writing articles about options and articles about specific stocks.

Thanks for the suggestion.
After loosing money in direct buying put or call options, I changed to this passive strategy.

I sell cash secured put option on tesla, if assigned will sell calls. This working like charm. No brainer. Good premiums.. depending on assignment I may have to sell call for 4 weeks ahead. Now I plan to 4 active trades in a month. I.e 1 week out, 2 week out, 3 week out, 4 week out.
Ramy Taraboulsi, CFA profile picture
@Value living , instead of letting the put option get assigned, you might like to consider rolling it over to a future date, possibly with a more favourable strike price, and earning some cash on the side...
what is the advantage of rolling instead of getting assigned or closing for loss. could you site an example. I never did rolled before.
Ramy Taraboulsi, CFA profile picture
If you still believe in the stock, and there is a sharp economic downturn (rather than a fundamental problem with the company operations), I would roll over the option to a future date, usually at a more favourable strike price, and even make money out of it.

Recently, I rolled over Zoom. I believe in the company prospects, and tend to write in-the-money put options on it. These options are 2-3 weeks away. If they expire worthless, I would write other contracts. If they are still in the money at the time of expiry, I would roll them over to a future contract (close my position and open a new position) so that I generate cash out of this transaction. I have done that at least 10 times over the last year on Zoom, and so far, these rolled contracts end up expiring worthless. Sometimes I have to roll it a few times to get it to expire worthless.

@Value living , please let me know if I answered your question.
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