Video on Selling Deep out of the Money Options to Increase Odds


Aug

8

2017

Video on Selling Deep out of the Money Options to Increase Odds

Click To Read Video Transcript

(Video Transcript)

Hi, I’m Michael Gross of OptionSellers.com. Welcome to your video edition of The OptionSeller Email Seminar. What we’re going to talk about this week is selling deep out-of-the-money options and why those are the type of options you want to target in your portfolio. A lot of books, courses, and newsletters are going to try and tell you that to make any money selling options you have to ride very close to the money whether you’re selling puts or calls. The reason being, and we’ve all seen this chart, is if we draw a time decay chart it looks like this, right? What they’ll tell you is you’re going to get your most serious time decay in the last 30 days of the options. This is 60 days out and this is 90 days out. They’ll tell you to sell here because options rate of decay accelerates in the last 30 days of their life. This is true, so we’re not going to contest that. The problem with that is when you try and sell an option with only 30 days left, what do you have to do? What you have to do is you have to sell the option right where the market is trading. You can’t sell out-of-the-money at all.

So, let’s say this is your price chart here and let’s say we are trading corn options. Your price chart is going like this, okay? Let’s say you’re right here. If you sell a 30 day option, you’ve got to sell that option almost right at-the-money, so what happens? If the price takes a dip, even a hiccup, for a couple of days, what happens? Boom boom right there, you’re in the money. The top things we have to teach our investors when they first start selling commodity options is you don’t sell 30 day options, you trade time for distance. This is a key concept you have to remember if you’re going to be selling commodity options successfully over time and you don’t want to be dealing with options going in-the-money, which we don’t. What do we want to do? Instead of selling the 30 day options, here is our corn chart again. Instead of selling your option here, you want to sell a put option, why don’t we sell it down here? If we want to sell a call option, instead of selling it here or here, right where the market is trading to try and get that 30 day time decay, let’s sell it up here. What does that do?

It does two things for you. One, it gives this market a mile to move, okay? Now, true, you’re going to have to go 90 or 120 days out to do this, but it’s going to give you a lot of time to let the market move wherever it wants to go and it’s going to give you plenty of time to see it coming if it is moving against your strike. That creates peace of mind for you. You’re the trader. You don’t need to be worrying every day, “Is my option in-the-money?” We don’t need to worry about that. You want to look at deep out-of-the-money strikes. This brings your primary risk, not for the option going in-the-money, but is it increasing in value or not? You can manage your risk based on what the value of the option is doing, not have to worry about if the thing is in-the-money or you’re going to get assigned or all these things people worry about. The other big benefit to trading like this, and this is especially true in commodities and it’s one of the reasons we advocate this strategy. You can read all about it in The Complete Guide to Option Selling. If you’ve read the book, this is something that we talk about a lot. Commodities lend themselves extremely well to fundamental analysis.

So, you’re looking at supply and demand and how those have affected prices in the past and how they might affect them in the future. Does that tell you what the market is going to do tomorrow? No, but it can give you a pretty good idea about what it’s not going to do over 60, 90, 120 days. As an option seller that’s all you need to know. So, by selling options this far out-of-the-money, that gives the fundamentals time to work and that’s all you’re looking for as an option seller, in commodities at least. You’re looking for time to give the fundamentals enough time to work. All you have to do is run out the clock. You’re selling them deep out. Is this guaranteed? Is there risk in this strategy? Of course there is, okay? Sure, the corn market could keep going and your option increases in value and you’ve got to buy it back at a loss, but I’ll take that 7 days of the week and twice on Sunday over trying to do this all week long and hoping the things doesn’t go in-the-money.

This is Michael Gross with OptionSellers.com. If you have more questions or you’d like to learn more about this, feel free to take advantage of the resources on our site. We have our free booklet, The Option Selling Solution, which I recommend to anyone. Obviously you can get a copy of our book, The Complete Guide to Option Selling, or you can also get an Investor Discovery Pack if you’d like to learn how to work with us directly. Thank you.

  1. Hi Michael,
    thanks again for your great guidance!
    My trading plan is based on selling options with a delta of 15 (-15) where I receive premiums between 400 and 600 USD on average. Would you say I should rather try selling a multiple number of options with a delta of 5 (-5) with a lower premium? (e.g. 4 of those options with a premium between 100 and 150 USD each). Do you have any experience or even backtests which would be more profitable in the long run?
    Thanks a lot and best regards,
    Thomas

    • Michael Gross Says:
      August 9, 2017 at 2:49 pm

      Thomas,

      Delta is only one factor we consider when selecting an option to sell (and not always the most important). That being said, while we tend to seek out slightly lower delta and/or slightly higher premium, your current plan sounds like it is on track.

      Best of luck in your trading.

      Regards,
      Michael

    • Chris Aubrecht Says:
      August 25, 2017 at 12:48 am

      Thomas,

      I have been selling futures options for several years and basically try to ensure my deltas are near yours (10-15). I would advise against going all the way to a 5 and selling multiples of those because you would likely be starting with too large of a position (in my opinion).

      Depending on the market, I generally write singles in my strangles, but for those with less of an ATR for volatility measurement, I may write 2 or even 3 (mostly with grains/meats). This has worked well for me.

      Then, rather than automatically jumping out at 2X premium, 3X premium, etc. you have some flexibility on rolling your more dangerous options out later in a multiple (ie. buy your 1 1300 GC call and sell 2 1330 calls, buy back your 1140 GC put and sell 1 or 2 1200s… you get the idea). If you start off at the beginning with 3 or 4 to a side, I’d highly recommend sticking to getting out at 2X premium because you’ve already got a lot of capital potentially tied up in the position.

      Also, I ensure always having 4-7 different markets expiring each month, preferably from at least 3 different sectors or more. It helps when you’re getting nervous about market X getting volatile when you have A, B, C, and D that are still wasting away nicely!

      OptionSellers is a GREAT resource and I have to say that Mr. Gross and Mr. Cordier really come across as trustworthy guys. I look forward to letting them control some of my nest egg while I continue to learn and have fun on my own as well!

      -Chris

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