As a business owner, I rely on many revenue sources to bring income in each month.
And as an entrepreneur, this means that I cannot spend more than I make on any given month.
So this means buying options is not a choice to run a successful business.
Think about the last time you went to a casino, and consider how many winners were actually there compared to losers.
My guess is that there are 1 winner for every 6 losers.
Because the casinos have the odds stacked in their favor so they won’t lose!
Let’s take a look
Before placing any trades I always check to make sure my 3 main requirements are met
These 3 main requirements are:
- I need to be paid upfront for my risk. I do not want to pay to trade
- Odds of winning must be in my favor. I do not want to be the gambler
- If I own stock, it will be at my price. I do not buy stock without a significant discount
So does buying stock or options give you those requirements?
I think not!
Actually, buying stock doesn’t even check any of those three boxes!
You see, it’s a common problem many traders have and they don’t even know it!
Let me explain…
Why I Don’t Buy Stocks
Many new traders don’t even realize they can generate income through selling stocks since they are constantly being flooded with buying stocks from tv network shows.
And for good reason… who doesn’t like the feeling of winning on a gamble?
It could be for $5 and a gambler would still be ecstatic.
But that’s not how to run a business.
So instead, I need to turn to selling options to make sure I am collecting money instead of spending it.
Now the same goes for trading stocks.
By buying or selling stocks, I can’t generate income from trading.
You see, stock trading is a single-dimensional trading strategy.
Sure it is a safe strategy, but it doesn’t generate the returns I need to make it worth my time!
Selling Options – Being The House
I always choose to sell instead of buying options when it comes to running my stock trading business.
Because when I sell options I am able to satisfy my 3 main requirements of trading.
- Paid upfront for my risk in a stock – I do not want to pay to trade!
- Odds of winning in my favor over 50% – I must be the house, not the gambler!
- If I own stock, it must be at a steep discount and I will hold for years if I needed
Selling options is a lot like being in a casino. The house has a small but well-defined edge. The long term goal and realize they will sometimes take losses, both small and large.
When correctly utilized, selling options is a sophisticated way of entering into equity trades or generating income for your portfolio.
Let’s take a look at how my options satisfy my trading requirements.
- Selling options allows me to collect income (the credit of the spread) up front.
- Odds of winning are over 60%, since you can win if the stock goes up, down, or sideways.
- Selling options (if assigned on my short puts) allows me to own stock at a huge discount!
So now that it makes a lot of sense to sell options over buying stock, let’s take a look at a couple different ways to trade credit strategies.
Option Credit Trading Strategies
In order to generate steady income, many traders turn to trading short options instead of buying stock.
This is because most options expire worthless and this behaviour makes selling options work like running an insurance company.
Since options are risk insurance for option buyers, the option seller holds the responsibility of the “insurance provider”. And for this risk the option seller will charge a premium (the credit on the option) for this risk.
Some of my favorite strategies are:
- Short “Naked Puts”
- Credit Put Spreads
- Credit Call Spreads
- Credit Iron Condors
Pros And Cons To Selling Options
Depending on the type of trader, there are many benefits to both buying and selling options. There are many different option strategies to choose from and each has unique risk associated with it.
Pros to selling options
Smooth Return Stream
Selling options is one of the most reliable and stable sources of returns in the markets.
Premium selling strategies tend to have extremely high win rates and are a great way to grow trading capital over time.
Most traders tend to feel better when they are winning rather than losing. This makes sense that traders would benefit from a system that has them winning a high percentage of trades.
This boosts confidence and leads to less “second guessing” the trade. This confidence tends to lead to smaller losses compared with traders who are buying “lotto tickets”.
Cons to selling options
No “Grand Slam” trades
Selling options tends to be “singles and doubles” type of trading. The knowledge that a big grand slam is right around the corner keeps traders coming back to their screens every day, waiting for that huge opportunity in the markets.
Unfortunately, option sellers won’t have this rush of excitement like hitting it big at the casino.
Potential of large losses
Another huge negative is the potential for large losses. While this is a remote possibility, it does still exist depending on the underlying security traded.
Traders can mitigate their risk to large losses by trading credit spreads rather than naked options. This is the “best of both worlds” as the trader can play the house odds while maintaining a controlled and limited risk profile for their account.
To summarize, premium selling is known to generate a wildly profitable and extremely smooth equity curve.
- There is the risk of an occasional large loss, but this is mitigated with the use of credit spreads instead of naked options.
- The return of a premium selling options book is that of a mean reversion stock trading system, with a large number of small wins with the occasional ‘fat tail’ trade.
- Selling Naked Puts is one of my favorite strategies since it allows me to purchase stocks at a discount and get paid doing so!