Selling Option Premium
Aug 25, 2010

Selling Option Premium

Most traders who make money when trading options choose to sell, rather than buy option premium.  If you accept that statement and wish to be part of this group, it's essential that you take the time to understand how options work before venturing into this territory.

Selling naked options is a risky strategy.  Sure you can adopt it, but only when you truly know how to mange risk and avoid a disaster.

It's far better to sell credit spreads than naked options.  The negative aspect of doing that is reduced premium.  In other words, the profit potential is less.

But, in return for accepting reduced profits, you get the guarantee of limited losses.  Over the longer term, limiting losses and preventing your account from taking a big hit is going to do more for your bottom line than earning larger profits (when those profits are limited, as they are when you sell options).

Today, I read about one new trader who is proud of himself for learning how to collect time decay by selling option premium.  What did he trade?  He sold a credit spread for $0.05.  Not only does he have to pay a commission, but the reward is hardly worth seeking - especially when one considers the risk.  Sure the risk is small, but it's not small enough to ignore.

If you plan to learn to sell option premium, please become educated before making your first trade.

Mark D Wolfinger

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