October 22nd, 2011 | 
Author: admin
Author: admin
Selling out of the money premium can be an efficient way to building wealth. It can provide a high probability trade that has great return.
So, what is premium selling? Premium selling is simply selling calls and puts on stocks. They can form spreads called bull put spread, and bear call spread. To be profitable the stock has to close higher for puts, or lower for calls, then the strike price of the option. For instance if you sell the $40 put and the stock is at $48 by expiration you would be profitable. No one is going to make you buy this stock at $40 and sell it for $48.
Some premium sellers choose to sell a put above the value of the stock. This is considered an in the money trade and is dangerous. In this case they must have the stock move above the price of the option by the time it expires. If it doesn’t they are forced to buy the stock at a higher price then it is actually worth.
This type of trading can be dangerous because you only make money if the stock does only one thing, go up. If it goes down or sideways they will lose money. Making this a speculative trade.
That is why option sellers are benefited if they sell out of the money options instead. This will give you a smaller possible gain but a much higher chance of being right. That is because you do not need the stock to go up for you to make money. It can go up, sideways or even down a little bit for the trade to be profitable.
Another thing that should be considered when selling premium is that you do not want to let the option have a long time. The less time you give the stock to move the higher chance you will be profitable.
