7 Ways to Get Higher Option Premium – Part II
Michael Gross continues with part 2 of “7 Ways to Get Higher Option Premium”
Hi, this is Michael Gross, co-author of McGraw-Hill’s The Complete Guide to Option Selling and Director of Research here at OptionSellers.com. I’m here this week with your bi-monthly video option selling lesson. It’s part of our Option Sellers Institute series. The title of this week’s lesson is 7 Ways to Collect Higher Option Premiums Part 2. Now, if you remember, two weeks ago in our video we covered the first 3 ways to collect higher premiums. They were selling naked, selling strangles, and selling closer to the money. This week, we’re going to cover the last 4 ways to get higher premiums and this is going to be a great video because we’ve got some exciting ways that you can really boost up your premium without really taking on a whole lot more risk. So, let’s jump right into it. Before we get started, for those of you that haven’t read it yet, The Complete Guide to Option Selling: Third Edition will explain all the lessons we cover here on the videos in detail with examples and show you how to become a great option seller. It is available now on our website at a 40% discount off of cover price, so you can get it at www.OptionSellers.com/Book and we’ll get it right out to you through Amazon.com.
So, let’s jump right into it. We covered the first 3 ways to collect higher option premium, let’s go right to number 4. The fourth way that you can collect higher option premium is to sell more time. Now, this is a biggie because we talk about this concept in our book, we talk about it constantly in our newsletter, and it’s something that we’re preaching to members of our private client group when we are selling options. A lot of people have been trained or brought up or read that, “Well, you only sell options with less than 30 days because you get the fastest rate of time decay.” Well, that sounds good on the surface, but when you dig a little bit deeper down into that, to sell options with 30 days or less you have to sell them almost right at the money to get any premium at all. One little blip in the market can put that option in the money. One of the big reasons we’re selling options to begin with is so we don’t have to deal with those daily fluctuations in the market. So, you can go further out-of-the-money and to get more premium, which is the title of this lesson, you sell more time.
So, rather than sell an option with 30-60 days on it, we may go further out-of-the-money so we can ride out the short term little blips, but we’re going to sell more time, so we might go 3, 4, 5 months out, sometimes even 6 months out, to sell a deep out-of-the-money option but take a fat premium on it. That doesn’t always necessarily mean you have to be in that option 3, 4, 5 months. If the market moves favorably that market’s going to decay, so often times, even though you sold an option that’s 4, 5, 6 months out, if the market moves favorably you can be out of that option 30, 60, 90 days prior to expiration. You don’t have to think, “Boy, that money’s going to be tied up all this time”… that’s not necessarily the case. Often times, you can continue to roll deep out-of-the-money options over several times before you actually get to that 6 month period that you sold them where the expiration is. So, number 4 is selling more time. It’s a great way to get more premium on your options.
Let’s go to number 5, and this is also a really good example. Number 5 is you sell volatility, particularly media created volatility. For those of you that read our June newsletter, we did a whole feature on using the media to take higher premiums out of your options. If you know the fundamentals of an underlying market, for instance, you study the corn market, you know what the supply is, you know when the crop’s being harvested, you know what the size of the crop is, you know what the expected demand is going to be, all of these type of figures you know and you have them in front of you. So, when a news story pops that “There’s a weevil in Nebraska” and media tends to feed on stories like that. They are often not reflective of the true fundamentals. It’s merely a media event and that can last for a couple days or it can last for a couple weeks now, not always, sometimes it’s for real, but the only way you know the difference is by knowing the fundamentals.
If you do, selling volatility can be one of the best ways to take higher premiums because, often times, a news story breaks on a market. “The weevil is loose. The weevil is loose in Nebraska.” For two or three days, what happens? Mom, Pop, and everybody sitting at home says, “Oh, we better go buy some corn.” So they buy corn, corn is going up, up, up, up. It’s driving the price of those call premiums through the roof because small speculators love to buy call options and, therefore, the demand for the call option increases and that drives up the premiums. Often times, if you get a volatility story breaking and you know the real fundamentals and you know that, hey, this story’s probably going to fade, you can sell call options a mile out-of-the-money. That’s a great way to take in big premiums and, often times, at an actually lower risk because by the time you’re selling them the volatility has already been priced into the market. Unless the situation gets worse, it has got nowhere to go but down. Number 5 is sell volatility and that could be the best one on the list.
Number 6… the 6th way to collect higher premiums is to leg out of credit spreads. Now, for some of you that have been trading options or selling options for a while, either on stocks or commodities, you probably know what I mean by this. For those of you that haven’t, leg out is just a term that means instead of closing out your whole credit spread at once you’re closing it out one side at a time in order to potentially take more profit on the other side. What do I mean by that? Well, let’s say you’re in a credit spread and, I’ll do it up here so you can see it on camera, here’s you chart, here’s you market, now you sold a vertical call spread, which we have covered in these lessons before. That’s corn… and you have a bear call spread on in the corn market. You sold a $3 call; you bought a $3.50 call. Halfway into your trade, the $3.50 call is still showing a premium of about $100 on it, but corn has gone down and you don’t think it’s headed back up again. What you can do is sell your protection.
Whatever premium is on that option when you sell it, that’s just extra profit on that trade. If your long call, say it’s worth $100, rather than let the whole spread expire where you would get $0 for this, you’re going to go ahead and sell it ahead of time, this is your protection you’re selling now, get whatever it’s worth, say it’s worth $100. You take the $100 then you wait the extra time, which it might be another 30-45 days for your short calls to expire. So now, whatever your credit was on that spread when you initially sold it, you’re going to get an extra $100 out of it because you sold your protection early. Now, it does involve a little more risk but typically you’re only doing that if the market’s moving away from your spread, these options have entered their fastest period of decay, so there’s not a lot more risk, but it can be a great way to really give your credit spreads a little extra oomph at the end. I do recommend it.
Which brings us to number 7. Number 7 is utilize a professional trader. Now, you may think this is a little bit of a self-serving type of entry, but it can provide you with some real benefits, whether you use our firm or some other firm, for a coupe reasons. One, if you’re using a professional money manager, he is typically placing orders of hundreds of options at a time so he gets the economy of scale. A lot of traders are a lot more interested out there in filling orders for 100, 200, 300, 400, 500 options at a time than they are filling your 1, 2, or 3 lot you’re placing. That can mean you’re getting better fills, not always, but sometimes. It’s enough for you to consider that.
The other situation is where you can it’s rapidly disappearing, but in commodities, CME, shogger board a trade, there is still a pit where options are traded in the open pit with floor traders. That can still provide you with some advantage because a floor trader, unlike where you’re just entering an order on the screen, can work your order. He can kind of tell you what the mood of the floor is. He can kind of tell you what the talk down there is and if he thinks he might be able to get you a higher fill by waiting a little bit. Our personal opinion is there are still advantages in using a floor trader when you can. It’s probably not going to be available 10 years from now, but while it lasts it’s still something there that you can take advantage of. Number 7 is using a professional trader to implement the option sales and that would conclude our lesson, 7 Ways to get Higher Premium out of your Option Selling.
If you’d like to learn more about our firm, our private client group, I do recommend this free resource to you. This is our Option Sellers Discovery Pack. It’s for high net-worth investors. It explains to you all the managed portfolio programs we have for high net-worth option sellers. It also comes with a 30 minute DVD of James Cordier’s seminar to high net-worth investors. Feel free to request that if you would like to receive it. I’m glad you were here for this week’s lesson. I hope you found it helpful. We’ll see you in two weeks with next time’s lesson.