Our Put Selling Strategy
(or how we sell options for income and steady capital growth)
First and foremost, WE DON’T SELL naked options!
We are long-term investors who use the strategy of selling puts as a mainstay system in achieving our long-term goals of steady capital growth. All our put options are secured or covered by cash and most of the positions last six or more weeks or long enough to ensure they end as winning trades instead of losers. This is not saying we never lose a trade, it’s just that we try and complete more winners than losers. This methodology has allowed us to succeed in consistently growing our entire investment portfolio.
Stock options are the greatest wealth building tools ever invented. And of the dozens of options trading strategies, selling put options is one of the safest investment strategies in the stock market. It is the belief by many in the investment world that the time will come when no investor will ever buy a stock without first selling puts or own stock without also selling calls against the stock owned.
A survey of stock market investors shows that most of them sell put options as a mainstay strategy. The reason for this is because selling puts generate a steady flow of cash income and offers a relatively risk-free environment for the investor. When a potential risk of loss manifests itself, a put seller can easily manage the investment by making trading adjustments to avoid catastrophic losses or eliminate loss entirely. This ability to minimize/avoid losses leads to long-term steady capital growth.
We pause here to reprint an article titled “Why Sell Puts?” which we believe makes interesting reading for anyone planning on using the strategy of selling puts as an investment system. This article was extracted from the website FullyInformed.com and we think the author is Teddy Knight.
In the above analogy of how to produce an average of 1.25% monthly return or about 16% annually, the author’s missive is predicated on the premise that his put option selling uses 100 percent cash security, i.e., each put position is secured or covered by 100% cash in his broker account. If he were to use anywhere between 50 – 60 percent margin (as we do in many of our trades) his average return can easily be about 2.5 – 3 percent per month. At these rates, one could produce annual returns of about 40% or better.
There are literally hundreds of investing strategies and styles in the stock market. Whether or not one is more superior to another depends on the individual investor and their level of comfort when putting their capital at risk through investing. What we do know is that after years of trading options we’ve concluded that the safest system of investing in the stock market is using the strategy of selling puts and calls. The monthly returns may not be fantastic but when you add up all those small monthly gains they do amount to a substantial annual return as illustrated in the aforementioned article.
Not convinced about how options can outperform stocks? We would like to refer you to an article about a true-life experience of an options trader who was challenged to show that option selling can actually beat stock trading at achieving higher investment returns. Reprinted below is the part of the article describing the author’s experience.
Have you ever wondered why so many advisory services hype how their trading strategy generates profits of 200%-500% or more? And yet you don’t seem to have the same rate of success when you subscribe to their service? These are all option buyers who shout about their successful trades on the rare occasions that these occur. They are silent on their big unsuccessful trades that end in losses. The fact is that options buyers have a mere 1 in 4 odds of a winning trade. If the option buyer has more losers than winners, who wins? The option seller of course! Conversely, therefore, option sellers have 4 in 1 odds of winning. And this is what we do at OptionEarnings.com. We sell put options in most if not all our trades. We sell calls only when we are assigned and own the underlying stock. See our current and past trading performance.
Visit our home page and see how we compare with other popular option advisory services.
Here’s how we accomplish more winning trades than losers
We select stocks and ETFs that have high option premiums. We choose only companies and ETFs that are sound and have been in existence for a good number of years.
The options selected must also have a fairly good volume of option interest to ensure liquidity.
We try and sell short term expirations to maximize option decay, usually within two to six weeks unless the position is rolled out in which case it may run for more time. As everyone options trader knows, while time is the option buyer’s enemy, it is the option seller’s friend. Speedy time decay is what we look for.
We sell options on stocks whose earnings release dates DO NOT fall within the options validity period to avoid possible price gyrations on those dates.
Finally, we carefully monitor and make adjustments on open positions that face threatening conditions.
For those who have extensive experience in using your broker’s margin privilege, this can be a very effective method of increasing returns on your trades. We use 50-60 percent margin in many of our trades. For this reason, we select options that require the minimum amount of maintenance margin thus enabling us to sell more contracts with our 50-60 percent usage of margin. For beginning options traders, it is strongly suggested that they sell only 100 percent cash-secured puts in order to avoid the potential risk of a margin call.
DON’T DELAY! LOOK OVER OUR SHOULDER AND LEARN HOW WE SELL PUTS AS THE GREATEST INVESTMENT STRATEGY IN THE STOCK MARKET
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