Top 3 Ways to Collect Higher Option Premiums
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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 option sellers, 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 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 responsibly and effectively. It’s one 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 Options Further Out in Time
This is an effective method of getting higher premiums without taking on a considerable amount of risk. 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.
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.
Later this year, we’ll be exploring some more advanced methods you can use to take larger premiums out of the option markets.
Until then, have a great month of option selling.
Michael Gross is author of McGraw Hill’s The Complete Guide to Option Selling. He serves as Director of Research at OptionSellers.com, a wealth management firm specializing in writing commodities options for high net-worth investors. OptionSellers.com and their analysis have appeared on CNBC, Bloomberg Television, Fox Business News, The Wall Street Journal, Reuters World News, Forbes, and Barron’s. For more information on managed option selling portfolios with OptionSellers.com, visit www.OptionSellers.com/Discovery for a Free Investor Information Package. (US $1MM Recommended Opening Deposit)
***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