Top 3 Ways to Collect Higher Option Premiums
Option Selling Institute
Everyone wants bigger option premiums and higher ROI. Here are three simple strategies you can use right now to target fat yields.
As a group, option sellers tend to be efficiency oriented. And efficiency can often mean getting the most “bang for your buck.”
To experienced option writers, that means collecting big premiums.
There are many ways to bring in higher premiums for the options you sell. We do not recommend all of them at all times. Bigger premiums can sometimes (although not always) mean taking on slightly higher risk. A consistently high yielding option selling portfolio typically involves a responsible blend of conservative and aggressive strategies. That being said, below find our top 3 strategies for taking the Big premiums for your portfolio.
Lets get started.
The Top 3 Ways to Collect Higher Option Premium
1. Sell Naked
Selling naked is the “power play” in the option seller’s arsenal.
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 responsibly and effectively. It’s one cornerstone of our philosophy, our portfolio strategy used in our managed portfolios and our book (www.OptionSellers.com/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 allows you to collect double premium without doubling your margin requirement.
Selling strangles is 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, suppose selling a put brings you a $500 premium with a $1,000 margin requirement. Suppose selling a call in that same market offers approximately the same thing. Selling them at the same time can bring in the same premium but at a lower overall margin requirement. It’s a case of the whole being greater than the sum of its parts. 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 Options Further Out in Time
Longer dated options can offer fatter premiums with reasonable risks for investors.
This is an effective method of getting higher premiums without taking on a considerable amount of risk . It is so effective, in fact, that we’ve made it one of the core components of our FUDOM option selling method (www.OptionSellers.com/FUDOM) , 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.
Taking bigger premiums must always be balanced against any additional risk it may entail. However, these three methods are basic strategies you can use to increase your take, in the right situation.
If you’d like to explore these and more ways to target higher premiums, be sure to check out our video double feature on this topic:
Until then, remember, when it comes to ramping up your option selling results, you can never stop learning. Have a great month of option selling.
Michael Gross is Director of Market Research at OptionSellers.com in Tampa, Florida. He is co¬author of the book The Complete Guide to Option Selling 1st, 2nd and 3rd Editions (McGraw-Hill 2015).
With over 18 years of experience in futures and options, Michael is a regularly featured guest author in a variety of financial publications. Michael’s published works on option selling in the commodities markets have appeared on Yahoo Finance, Forbes.com, Businessweek.com, Optionetics.com and Futures Magazine. His market comments have been featured by Barron’s, The Wall Street Journal, Reuters World News, Dow Jones Newswires, Kitco, and Fox Business News.