It's true, selling option premium gives you a better chance of coming out on top vs. buying option premium. However, the stock market has been slowly grinding higher so far this year.
With that said, there isn't much fear of downside…and option volatility is low in a lot of stock names. But don't get confused, blindly selling option premium in hopes of collecting time decay is not the way you want to be playing it.
Now, I like to sell put options with the same mind set a value investor does-when they go out and by strong stocks on a pullback. Let me explain, I look for stock names that I like…which are experiencing an overextended move on the downside and appear to be somewhat oversold.
For the most part, when a stock gets beat up…stock investors tend to go out into the option market and buy puts to hedge their position. This demand for puts, along with speculators betting that the stock will have a further decline-really causes the option volatility to spike.
Remember, when you buy options…an increase in option volatility helps…when you sell options…an increase in option volatility hurts you.
With that said, it's important to find something where the option volatility has elevated. The higher the implied volatility…the more expensive options become… that means the more premium we collect when we sell options.
After all, we want to get "paid" to take on the risk.
The idea is that after an overextended move, the stock price action will either take a pause or even rebound a little. If this happens, the option volatility will get sucked out of the option premium and we'll be able to buy back our options for a cheaper price than what we sold them for.
If any of this isn't clear yet…don't worry…I've made a video training explaining everything in full detail.It's my five step process on how I sell put options for a high probability of success.
In the video, I go over a real-life case study on how the whole thing works.
You'll learn why finding options that have high volatility and an overextended chart are so important.
How I spot them…which option strikes and time frame I select…along with when I look to take the trade off.
After you've watched the video…make sure to drop me your thoughts…I'll be hanging out in the comments section below.Join For Free To Receive My Ideas & Market Commentary I Only Share In Email
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.