7 Ways to Collect Higher Option Premiums (Part 2)
In your email lesson from June, we covered part 1 of this lesson, the first 3 ways to collect higher option premium. To review, they were:
- 1. Sell Naked Options
- 2. Sell Strangles
- 3. Sell Closer to the Money
If you missed this lesson and video in your inbox, you can still view it here >> 7 Ways to Collect Higher Option Premiums (Part 1) <<
Part 2 covers four more ways you can collect higher premiums in your portfolio. While some of these are a bit more advanced, you will find them to be equally effective.
Let’s get Started.
4 More Ways to Collect Higher Option Premiums
4. Sell more time
In our opinion, this is a more conservative method of collecting higher premiums than #3. But effective. So effective, in fact, that we’ve made it one of the core components of our FUDOM option selling method, used exclusively in our managed portfolios for private clients. It’s a fact that the more time left on your option, the higher premium you can collect. The tradeoff is that you have to wait longer for the option to expire. Many traders do not have the patience for this. Others feel that selling more time allows a greater window for something to “happen” in the markets. If you want to reduce the chances of something “happening” to your position, know your fundamentals. Sharp moves can happen in any market. However, they are less likely to happen in markets where fundamentals do not support them. Selling more time can be a slower but steadier path to higher returns.
5. Sell Volatility – Fade the News
It’s not secret to most any option seller that higher volatility means higher premiums. Volatile markets bring in more speculators who not only drive prices in the underlying, they buy options. This means more demand. With more buyers clamoring for the options, premium for the options goes up. Typically, as an option seller, this will mean opportunities for you. This is not to suggest you should sell in front of runaway, breakout moves. However, a spike in volatility often makes the “ridiculous” strike prices that we refer to in The Complete Guide to Option Selling, 3rd Edition, temporarily available to option sellers. People (investors are people), tend to get carried away or lose their heads in the excitement of fast moving markets. As an option seller, you can use these situations to your great advantage.
The days or weeks following a spike in volatility can often be a great time to sell options. A good example is after a surprise report or news event. James talked about this a bit in the June Option Seller. An unexpected number comes out and prices of the commodity in question must adjust to reflect the new numbers. This is often (though not always) done quickly – over a period of 1 to 3 trading sessions. After that, the market has often “priced” the new number and trading resumes as normal.
It is not uncommon for the options to “price in” the most extreme possibility in the first day and then adjust its value lower – even as the price of the underlying continues to move towards it. These can be ideal conditions for collected fat premiums – again, however, only if you know the fundamentals.
Other types of volatility surges, such as weather or geopolitical events are more fluid and require more caution. Reports are solid and the market can adjust to them quickly. Weather and geopolitical news is constantly changing and thus, selling options in weather or “fast news” markets can get dicey, especially for beginners.
Selling premium against news events can be a good way to collect large premiums. The market often (but not always) prices the effects of an event within the first few days of its occurrence. Options can sometimes far overprice the effects of an event.
Many old time traders favor the “Wall Street Journal Rule.” If a commodities story makes the front page of the Wall Street Journal, it’s time to fade the story. It’s not a guaranteed strategy, of course. As a rule, however, fade the news. Selling options against the hype can be a good way to get big premiums.
6. Leg out of Credit Spreads
Since the title of this column is not “How to run the most effective, risk adverse option portfolio” we will refrain from preaching the merits of credit spreads and instead offer just a brief tip for increasing your premium from them. A credit spread involves selling an option (or group of options) and then buying another option of lesser value to protect or “cover” your short option. Many sellers of credit spreads simply put them on and let them expire, keeping the “credit” (the difference between the two options) as profit. There is nothing wrong with this and it can be a conservative way to build a portfolio. However, to squeeze a bit more profit out of your credit spread – try this: Sell your protection early.Once the short options in your credit spread have decayed by 70-80-90%, the risk in them drops accordingly. This can be a good time to sell your protective option(s) back to the market. Obviously, they will have decayed as well. However, you will recapture some of the premium you paid for them. This can boost your overall return on the spread.
7. Enlist the Help of a Professional
Option trading on commodities is one investment vehicle where using a floor trader in the pit can still offer you an advantage. While floor traders are gradually being phased out in both stocks and commodities, there are still some markets where they remain available and effective. Limit orders placed on commodities options through electronic markets can often sit unless a trade actually takes place that “triggers” a fill. In other words, it has to be filled. Floor orders are actively worked by brokers. And if your limit order does not get filled, a floor broker can give you an “active” bid/ask – something that does not always show up on an electronic screen. This is especially true in placing larger orders which floor brokers are very motivated to fill. A good floor broker can sometimes work the order for a better fill. More importantly, they can sometimes get filled on a ticket that might be overlooked in the electronic market.
A professional trader or manager (off floor), on the other hand, can sometimes give you the benefit of economy of scale. If you’re using a fund manager, he may be placing orders for all of his clients at once. Thus, instead of working your order alone for 5 or 10 contracts, he may be selling 500 at a time. These orders tend to get attention whether placed on the floor or electronically. Experienced fund managers often work through their own network of floor traders as well.
In addition, a professional’s skill at reading “between the lines” on bid/ask spreads, working the order itself, and judgment in timing (sometimes its better to wait for another day) may be superior to your own. This alone could result in higher premium for you.
A final word
Collecting the biggest premiums is not necessarily always congruent with having the best return at year’s end. To successfully manage your option selling portfolio, you must balance premium collection with responsible risk management. Each of the items listed above can indeed boost your premiums. However each also comes with its own unique risk of implementing it. Any one of these methods will not be right for every situation. These are a list of strategies and tools you can use. How you apply them will determine your ultimate performance.
If you are a high net worth investor and would like to learn more about selling options as a core investment strategy, you can request a FREE COPY of our Investors Guide to Selling Options: How to target outsized returns, gain real diversification and achieve investment peace of mind in any type of market. To get your free copy, go to www.OptionSellers.com/Booklet.
For more information on managed option selling accounts with OptionSellers.com, visit www.OptionSellers.com/Discovery or call 800-346-1949 (813-472-5760 International) to schedule a consultation. Consultations are limited and a pre-application is required.
James Cordier is the founder of OptionSellers.com, an investment firm specializing exclusively in writing commodities options since 1999. OptionSellers.com offers managed option selling portfolios starting at $250,000 minimum investment. James’ market comments are published by several international financial publications and news services including The Wall Street Journal, Reuters World News, Forbes, Bloomberg Television News and CNBC. Michael Gross is director of Research at OptionSellers.com. Mr. Cordier’s and Mr. Gross’ book, The Complete Guide to Option Selling 3rd Edition (McGraw-Hill 2014) is available at bookstores and online retailers now or at a special discount through the OptionSellers.com website.
*Price Chart Courtesy of CQG, Inc.
***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.