Why should you start selling options?
Firstly, Warren Buffett, one of the greatest conservative investors of all times, also sells options and has profited billions of dollars.
Just a recap about what options are and how options work.
- Call Options – it gives the option buyer the right to buy the stock at an agreed fixed price at an agreed date in the future.
- Put Options – it gives the option buyer the right to sell the stock at an agreed fixed price at an agreed date in the future.
When you sell options, the options buyer pays you money(i.e. premiums) upfront.
It works like insurance company.
When you sell PUT options, you are selling insurance to the options buyers that you will buy the stocks at the agreed price even if the stock price falls below it at expiration date.
Similarly, when you sell CALL options, you are selling insurance to options buyer that you will sell the stocks at the agreed price even if the stock price rises above it at expiration date.
So, what is Warren Buffett’s approach to selling options?
Warren Buffett looks for good stocks that he intends to buy and own for the long term. But, if he thinks that the current stock price is overvalued, he will sell PUT options to buy the stock at a lower price.
This is not the best part.
The best part is that the premiums he collects from selling PUT options will further offset his cost price of the stock he wants to buy and own.
So, if you are looking to invest in stock market, you should do so by selling PUT options instead of buying the stocks directly from the stock market.
But, if you are just looking to earn consistent and stable monthly passive income, you can also sell PUT options.
Here are some of the advantages of selling options for monthly passive income:
- Time is now your friend
If you are familiar with buying and selling stocks, you should know that you sometimes have to wait for months or even years before you take profit.
With options selling, time is now your biggest ally.
There’s a negative correlation between time and the value of the options.
All the options have an expiration date. As it goes near its expiration date, the value of the options generally goes down.
What does this mean to you?
As options seller, you make money when the value of the options drops. The maximum profit you earn from options selling is when the options expire worthless at expiration date.
Before expiration date, you can also choose to take profit by buying back the same options contract at a lower price.
- Low maintenance
This options selling income strategy requires very little time to execute. Typically, I spend about 10 to 15 mins to enter my trades for the week or the month.
After that, I don’t have to sit in front of my computer screen to monitor my positions at all.
Normally, it takes me 30 minutes a week to check on my positions.
So, even if you have a full time job, you can use this strategy to earn extra income on the side as well.
- High probability
Options selling income strategy is a high probability strategy.
Firstly, majority of options expire worthless.
Secondly, you can always use the analysis tool to choose options that give you a winning edge.
We all know that casinos make a lot of money.
Because they have the edge over the bettors.
Now, as options sellers, you can have the odds on your side.
In other words, you are the “House”.
- No longer need to predict the direction of the market
If you have traded stocks or currencies before, you know that you make money only when you are right about the market direction.
But, the truth is that no one can predict where the market will go next.
With options selling strategy, you can profit without predicting the direction of the market.
When you sell PUT options, you still make money if:
- Share price goes up way above the strike price by the expiration date
- Share price goes down but still stays above the strike price by expiration date
As long as you pick a strike price that the stock price will unlikely go down to by the expiration date, you will be able to make a profit.
- Easy to learn and get started
It’s very easy to learn even though you don’t have financial background.
If you know how to do 5th grade maths, you are good enough to learn this strategy.
To get started, you will need a capital of at least $2,000.
Of course, you will get higher returns if you are able to start with more capital.
The ideal size of your startup capital is $5,000 to $10,000.
Before you start selling options with real money, it’s advisable that you use demo accounts to practice first.