Strategy & Trade Management
This is arguably the best, most conservative method to enter trades. This is the first strategy that I recommend for you to execute.
You’ll develop preferences as you make money. You’ll also develop preferences as you miss out on profit occasionally. The important part here is that you learn from your experience in the market and make money while you make mistakes.
I love selling both calls and puts that have zero intrinsic value and are composed of 100% premium.
I like holding shares and selling options that are 3-5% higher than the current share price that expire within 7 days.
The great part about selling options is that you’re constantly building your cash position and/or account value regardless of the movements in share price and your predictive accuracy. Executing your trades at any reasonable strike price is more profitable than sitting out or deviating from your strategy.
Warren Buffet famously loves selling puts. (He also sells calls when he believes equities are overvalued)
Selling puts allows you to specify the price that you’re willing to pay for a stock and collect a premium if your specified price is not reached at the end of the week.
Premiums are always highest near the current share price. The option contract just above share price has the highest premium with zero intrinsic value.
You can use discretion to take advantage of this high premium. This is helpful when you are first buying into a position or maintain a bearish opinion on share price.
Strategic Selection of Strike Price
Give yourself the best probability to win by evaluating companies and share prices using the three categories of variables described in the Analysis Section.
As a trader, you choose a strike price that fits your beliefs and opinions on share price. In general, the more bearish your predictions for price, the lower strike price put you should sell.
Analyze share price using FA, TA, and Sentiment. Develop a Bullish, Neutral, or Bearish weekly opinion. Use this guide:
Opinion & Strike Price Selection
Bearish 10% below current price
Neutral, Not Sure, Default 3% below current price
Bullish or Buying into a new position 0% (Sell Put nearest current share price)
Execute the Trade strategy in your own account
Sell options on Friday between 3:30 and 3:50pm EST.
Trade Options > Sell > Put > Expiration date will be this Friday
Set a limit order for the SELL PUT Contract.
Review & execute.
Manage the Trade
Wait until the contract expiration date around 3:50 PM EST and check the outcome of your trade.
Selling Puts: Example Trade Setup
If that explanation seemed too abstract to comprehend, here’s a real trade setup using numbers accurate on date of writing: December 5, 2020.
AAPL is trading at $122.12
Let’s assume you’ve done your research and you want to own shares of AAPL while selling calls weekly. Instead of jumping into your position near market value of $122.12, you can choose to sell puts to give yourself a better/lower entry price.
Say you want to pay $118 for AAPL … about 3.5% lower than the current price. You can Sell a Put with the strike price of $118 that is currently listed at $0.53 which can be bought or sold for $53.00
This accomplishes two things:
1) You collect a premium weekly if AAPL closes the week any higher than $118.
2) If AAPL closes below $118 then you are assigned the shares.
This means that you now own AAPL at the price ($118) that you wanted to buy when the shares were trading at $122.12.
In addition to getting the shares at your specified price, you keep the option contract premium.
For this example, the $11,800 that you use to sell puts would allow you to collect $53 dollars in premium this week. Next week the numbers will change but a similar premium will be there waiting for you to collect it.
Important to note: If you are assigned AAPL shares at $118 and AAPL is trading at $116 by the end of the week, your account value will be down by the difference. $2 per share in this hypothetical example.