As an investor, selling options remains the most profitable strategy in either Short-Term trading or Long-Term trading for the following reasons:
Historically high success rate
Non-directional trading
Consistent monthly income
Time decay is on your side
Definable risk control
Freedom to do other things
When you write/sell options you put the odds in your favor. The truth is that even if you have never traded this strategy before in your life, you are already more than 76.5% more likely to make money than an option buyer according to a CBOE study on option traders between 2003-2008. This is because most options will eventually expire worthless. By choosing to sell instead of buy, you automatically begin each trade with odds of success in your favor.
Most option traders buy a call if they think – predict - the market is going up or buy a put if they think - predict - market is doing down. If you buy an option, you almost always need a large, fast move and perfect timing in your exit to show any type of reasonable profit on your trade. Selling an option avoids these requirements for success. By writing/selling options, you avoid the game of trying to predict where prices will go.
One of the best advantages about writing options is that they’re income-oriented. You receive a credit up front for opening a position and when the option expires worthless you get to pocket the net credit and move on to the next trade. It’s a consistent stream of income each and every month.
Did you ever buy an option and get a big, favorable move in the underlying only to end up with a small gain, if at all? This is the harsh effect of time decay working against you as an option buyer. When you write options, you put time decay in your favor. If you sell an out of the money option, the entire value of that option has is time value. As time passes, if the market behaves favorably, the option will gradually lose it’s value and expired worthlessly – leaving you will the whole premium you collected up front.
For example, let’s use the chart below:
Our POTS system determines what strike prices to sell options in the market and what the odds are that the market will reach that trading level by expiration. Then we constructed a conservative trade based on the best possible trading odds. That means we are entering positions were the likelihood that the market price will not breach the defined strike prices is extremely low. These probability calculations are a key part of managing the risk within the trade.
As you can see in the chart, we would have sold options both above ($135 Call) and below ($75 Put) the market’s current price ($105) with minimal risk of a loss at expiration. This type of hedge trading creates the ultimate income portfolio and historically is the most successful.
Start trading with higher odds of success and earning consistent monthly income!
