5 Tips For Selling Options ProfitablyHey guys! In this post, we'll detail 5 key tips to keep in mind while selling options that can massively improve trading results over the long term. Let's jump in.
Selling options has become a more popular strategy lately, due to the fact that traders can control, to some degree, their win rates and R:R setups. If you've followed us for any length of time, you know we're big fans of selling puts.
This is because there are only a few things that most traders and investors care about when they get involved in the markets:
- Returns
- Volatility
- Difficulty
- Repeatability
Selling puts is a great blend of all four.
However, shorting put options to outperform the market is simple, but it's not easy.
Here are 5 key tips to improve your option selling skills:
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1.) Make sure the underlying stocks are high quality. ✅
Selling put options is no different than building a portfolio of stocks.
There's a chance one could be assigned, and it's key that you're ok sitting in a position for a while as it chops around.
Let the edge work.
2.) Avoid selling puts when the VIX is low. 💥
Low 'fear' in the market = cheap insurance.
Low premiums = bad things happening when stuff goes wrong.
3.) Look for stocks that have sold off. 📉
Oversold stocks (that are high quality) are perfect candidates for selling puts.
Unless they are in a brutal downtrend, the recent selloff means there's more fear, which means higher premiums.
It also means a better entry price.
4.) Set a minimum return requirement. 💸
If the puts you're selling don't yield more than the S&P 500 does annually, then why bother?
Make sure that the annualized yield of the puts you're selling total more than 7-8%, and ideally more than 12%.
Compounding is the goal.
5.) Don't use leverage. ❌
Using leverage is a quick way to the poor house if something goes wrong.
It's much better to build a portfolio of positions in cash where no position takes up more than ~3% of exposure.
It can be "expensive" to start, but it's worth it.
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There you have it - 5 key tips for selling options. We hope you enjoyed!
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