Top 7 Ways of Collecting Higher Premiums – Part 1
Michael Gross, co-author of McGraw-Hill’s The Complete Guide to Option Selling, discusses the top ways to collect higher premiums in your option selling account.
Hi, this is Michael Gross, co-author of McGraw-Hill’s The Complete Guide to Option Selling, also Director of Research here at OptionSellers.com. I’m here for your bi-monthly lesson as part of our Option Selling Institute series. The title of this month’s lesson is 7 Ways to Collect Higher Premiums. Now, this video is Part 1 of this series. We’re going to have Part 2 in two weeks, so today we’re going to cover the first 3 ways that you can collect higher premiums when you’re selling options on commodities. Before we get started, if you haven’t read it yet, The Complete Guide to Option Selling: Third Edition by McGraw-Hill will cover all of the topics we discuss in these videos with you. You can get it now at a 40% discount on our website… www.OptionSellers.com/Book. You can get it at a much better price than you will at Amazon or down at Barnes and Noble.
Let’s talk about how you get higher premiums on your options. Today, we’re going to discuss the first 3 ways that you can get the higher premiums. We’re going to start with a basic. Number one, sell naked. This is somewhat of a semi-obvious way that you can get higher premiums, but a lot of people are a little bit hesitant to sell naked, especially in commodities, because they may be used to credit spreading from their equities and they want the protection. Yes, spreads are a good way to go, but if you want higher premiums you should not discount the benefits of selling naked in your portfolio. For our private client group, we try and get a mix of both credit spreads and selling naked. Why? Because you get the most bang for your buck when you’re selling naked. If you’re an option seller, selling naked is your power play, it’s your right hook, it’s your strong side sweep, because when you sell naked, one, you can take profits sooner… you don’t have to stay in it like you do in a credit spread, but it’s the most purest way to collect premium. Typically, you can’t sell credit spreads in every market but you can sell naked. You don’t have to worry about getting an off-set or taking a lower premium on a credit spread. When you sell naked you get the full premium for yourself and you keep it.
The number one way to get more premium and the most basic way is to sell naked options. The risk can be managed responsibly on a naked sale as well, despite what some people think. Yes, there’s unlimited risk, but there’s plenty of good ways to manage risk on a naked option and we talk about those in a lot of our seminars and, of course, in the book you can read about those, as well. Number two, ways to collect higher premium: the strangle. The strangle is a great strategy. It’s one of the best option strategies, we feel, that can be used by an individual investor. It’s almost as basic as selling naked. It’s not complex, you don’t have a lot of offsetting premium or buys or sells, things like that. For those of you that are uninitiated, a strangle is simply the strategy of selling a call above the market and a put below the market. Your objective is for the market to simply remain between those two strikes. The wider you sell your strangle, or the further out-of-the-money, the more room you give the market to run.
The great thing about a strangle and how it brings you more premium is when you sell a strangle, you get double premium because you’re getting premium for the call and the put, but the margin requirement is not what it would be for taking the margin requirement for the call and the margin requirement for the put. The margin requirement is actually less of the sum of those two, if you know what I’m saying, so you’re getting more bang for your buck by selling a strangle. For instance, if you sold a call option on a particular market, say the corn market, and the margin requirement was $1,000, and you sold a put at a particular strike below the market and the margin requirement for the put was $1,000, if you sold them together as a strangle your margin requirement might only be $1,500 instead of $1,000 plus $1,000 which is $2,000. Your margin requirement will be less and that’s because strangles have that offsetting factor that we’ve discussed in a past lesson. A gain in one typically means the other one losing some value and it’s offsetting a loss, to a certain extent to a certain degree. Strangles are a great way you can use to get higher premiums when you’re collecting option premium.
Number three is you sell options that are closer to the money. Now, this isn’t necessarily the way we recommend to go about getting option premium, getting higher option premiums, but the subject of this seminar is how to get higher option premiums. The further out-of-the-money you go the less premium you’re going to get, the closer to the money you go the more premium you’re going to get, obviously the more risk you take on, as well. Your goal as an option seller is to strike a balance between those two things where you’re getting a good premium but you’re far enough out-of-the-money that you feel comfortable with the risk. The third way, if you want to bump up the amount of premium you collect, go a little bit closer to the money. If the strike you want isn’t right there, you might drop down a strike and pick up and get it above that premium level you want and push up the amount you’re collecting which, at the end of the day, that’s what we want… higher premiums.
I hope you enjoyed Part 1 of this lesson, How to Collect Higher Option Premiums. We’re going to have Part 2 in two weeks, so you’ll get the other 4 then. In the meantime, if you would like to learn more about our private client group, managed portfolios in which we implement these type of strategies, I do recommend that you get our Option Seller Discovery Kit. This is for high net-worth investors. It’ll tell you all about our programs we have, how you can work directly with us through our private client group. It also comes with a 30 minute DVD of James Cordier’s seminar for high net-worth investors. Thanks for being here this week and we’ll talk to you in two weeks.