7 Ways to Collect Higher Option Premiums (Part 1)
As a group, Option Sellers tend to be efficiency oriented. Always attuned to maximizing odds, sellers key towards being efficient. And efficiency can often mean getting the most “bang for your buck.”
To option sellers, that means collecting big premiums.
There are many ways to bring in higher premiums for the options you sell. Leaning towards a more risk adverse stance, we do not recommend all of them at all times. However, taken as a whole, the list in this feature will give you a solid primer for putting the maximum amount of premium in your account when you write options. This week’s piece is Part 1 of this lesson – encompassing the first 3 ways to collect higher premiums. Part 2 will be featured in your July edition of the Option Seller Newsletter. Look for it in your mailbox on or around June 30th.
Lets get started.
The First 3 Ways to Collect Higher Option Premium
1. Sell Naked
Spreading has it’s merits. But for pure premium collection, there is no way to get bigger premiums and realize them faster than selling naked. While the word conjures up images of being “exposed” and thus discourages many investors from exploring it, naked option selling can be done responsiblyand effectively. It’s the cornerstone of our philosophy, our portfolio strategy used in our managed portfolios and our book. While risk must sometimes be managed a bit more closely than “covered” risk, you are doing yourself and your portfolio a disservice if you do not consider selling naked in at least some situations. It’s the power play, the strong side sweep, the right hook in an option seller’s arsenal.
2. Sell Strangles
Selling strangles is possibly our all time favorite option selling strategy. While not ideal for hard trending markets or breakout moves, selling strangles (selling a put and a call in the same market) can be an amazingly versatile strategy. It can be deployed in a wide variety of market conditions and has a magical effect on boosting your premium: Doubling your premium collected while reducing your margin requirement (as a percentage of premium).
For instance, selling the put may bring in $500 premium and carry a $1,000 margin requirement. Selling the call may do the same. But selling them at the same time brings in the same premium but lowers the margin requirement. Thus, selling the put and call together brings a greater return on invested capital. As a bonus, selling a strangle also comes with some built in risk temperance. A move against your call is at least partially offset by gains in your put (and vice versa). Thus a strangle can be a flexible way to build account premium quickly. While the ideal scenario for a strangle is a sideways or range trading market, strangles can also be effective in directional markets.
3. Sell Closer to the Money
While not our first choice for collecting higher premium, selling closer to the money will increase the premiums you collect. For the risk adverse, it may not be your first choice either. The closer you sell to the money, the better chance for your options to go in the money – a place no option seller wants to be. After all, one of the main reasons investors sell options is to avoid short term market fluctuations. At the same time, moving a strike or two closer can sometimes make a big difference in the premium you bring in. Especially in markets where deep out of the money strikes are available and fundamentals support your position. For instance, if Coffee is at 1.50 per pound, it probably isn’t going to make a big difference from a risk standpoint if you sell a 2.90, 2.80 or 2.70 call. But it could make a noticeable difference in the premium you collect. In this type of situation (all strikes are deep out of the money,) selling the closer strike can make sense.
Taking bigger premiums must always be balanced against any additional risk it may entail. However, these first three methods are basic strategies you can use to increase your take, in the right situation.
In part 2 of this lesson, we’ll explore some more advanced methods you can use to take larger premiums out of the option markets.
Until then, have a great week of option selling.
If you are a high net worth investor and would like to learn more about managed option selling accounts through OptionSellers.com, you’ll get all of the details and more in our complimentary Investor Discovery Kit. Your kit includes a special investment plan for high net worth investors, examples of option selling positions and a 30 minute Video DVD Get your free informational kit now at www.OptionSellers.com/Discovery. Your privacy is kept strictly confidential and there is absolutely no obligation ($250,000 minimum investment.)
James Cordier is author of McGraw Hill’s The Complete Guide to Option Selling. He is also the founder of OptionSellers.com, an investment firm specializing in writing commodities options for high net-worth investors. Appearing regularly on CNBC, Bloomberg Television and Fox Business News, James’ market comments and research forecasts are published by most major financial publications including The Wall Street Journal, Reuters World News, Forbes, and Barron’s. Michael Gross is co-author of McGraw Hill’s Complete Guide to Option Selling. He serves as head research analyst at OptionSellers.com with published works on options trading featured by Forbes, Businessweek and Yahoo Finance.
*Price Chart Courtesy of CQG, Inc.
** Fundamental Charts courtesy of Hightower Research
***The information in this article has been carefully compiled from sources believed to be reliable, but it’s accuracy is not guaranteed. Use it at your own risk. There is risk of loss in all trading. Past performance is not necessarily indicative of future results. Traders should read The Option Disclosure Statement before trading options and should understand the risks in option trading, including the fact that any time an option is sold, there is an unlimited risk of loss, and when an option is purchased, the entire premium is at risk. In addition, any time an option is purchased or sold, transaction costs including brokerage and exchange fees are at risk. No representation is made that any account is likely to achieve profits or losses similar to those shown, or in any amount. An account may experience different results depending on factors such as timing of trades and account size. Before trading, one should be aware that with the potential for profits, there is also potential for losses, which may be very large. All opinions expressed are current opinions and are subject to change without notice.