The appropriate length of time suggested by the option seller strategy is almost 6 weeks. Big market trends are unlikely to occur frequently, and market trends tend to oscillate up and down with the actual value. Therefore, the success rate of profit from buying options is actually not high. Relatively speaking, although the profit from putting strategy is not high, it is relatively stable.
Of course, each person’s risk tolerance and the success rate they pursue are different, which will lead to different operating methods. For example, if you hope for a high success rate, you can lower your profit expectations. In fact, option trading can also be classified as a game of probability and odds. It depends on whether the individual wants to make a quick decision and make a small gain, or whether he can extend the front and win steadily.
In fact, in options trading, we do not need to accurately predict the market outlook to obtain profits. Through tracking the returns of multiple varieties and strategies, we found that in fact, the single-sided seller with the highest risk always makes a profit with a high probability, and the returns are very high. The wide straddle strategy of double selling also has significant advantages.
If you put the simplicity of thinking into option trading, the simplest operation is to sell options. When facing adverse trends, do not be greedy for huge profits, do a good job in risk control, and be friends with time. Time will bring you success. Give you the benefits you deserve. In the absence of an obvious trend, operations with a high probability of profit should be used.
This method is to be an option seller, rather than buying a large number of options and betting on huge profits. When selling options, we are worried about risks and can hedge risks according to the situation.
How to be an option seller
The first rule of seller’s mentality is to stop loss first
The profit of the option seller is limited but the loss is unlimited. Therefore, the stop loss is the seller’s The most effective risk control method is also the prerequisite for sellers to make profits. The success of the seller is different from that of the buyer. It does not happen overnight, but needs to exist in the market for a long time. There are many methods of stop loss, such as fixed price stop loss, technical indicator stop loss, psychological price stop loss, fixed capital ratio stop loss based on capital management, etc.
The second tip of the seller’s mentality is to limit the position.
Being an option seller, position control is a required lesson, because you need to pay a full margin to open a selling position. Once the position is full, the operation , even if the general direction is correct, the position may be forcibly closed due to insufficient margin due to temporary market fluctuations, unlike stocks that can wait until the end of the world. For sellers, forced liquidation means permanently losing the profit opportunity of the liquidated position. Therefore, the seller should always take ensuring the safety of funds as the core discipline of investment, and must not operate with a full position
Article 3 of the seller’s mentality: Follow the trend
As the obligated party of the option, the option seller The risk is theoretically unlimited. Therefore, in the absence of effective risk hedging, judging the market direction is crucial for option sellers. There is a wise saying on Wall Street: Trend is your friend, remember you cannot go against the trend. For option sellers, following the trend means selling calls in bear markets and selling puts in bull markets. Although this tip is self-explanatory, not many people can actually do it. To capture the trend of the market or a single stock, you can use methods such as fundamental analysis and technical analysis. These methods all have certain effects, but they are definitely not a "panacea."
Seller’s Tip No. 4: Volatility is the enemy
Whether you are an option buyer or seller, volatility is an important factor that needs to be studied and judged. Buyers tend to chase high-volatility stocks, while sellers prefer stocks with stable stock prices. After the seller sells the option, if the stock volatility increases, the probability of the option being exercised and the seller's cost of closing the position will increase. Unfortunately, the premiums that sellers can charge tend to be lower for low-volatility stocks. Sellers can use options analysis software to find options with relatively low volatility and relatively high premiums.
Article 5 of the seller’s mentality: Time is the best friend
The option value includes time value. Every day that passes, the seller can earn one day’s time value. Additionally, options are like "ice in the sun" and their time value decays in a parabolically accelerated manner. Taking a four-month option contract as an example, the time value declines slowly in the first month, but as it approaches the expiration date (especially in the last month), its time value declines more quickly. Compared with options in other time periods, options expiring within three months tend to have a higher unit time value. That is to say, for sellers who want to earn time value, selling options expiring within three months The utility is maximum.
Many experienced sellers earn time value income through the calendar spread strategy of selling near-month options contracts while buying far-month options contracts at the same price.
Seller's Tip No. 6: Look for overvalued opportunities
Successful option sellers are always keen to look for options that are "overvalued". How to find "overvalued" options? The core factor in option pricing is volatility. Generally speaking, if the implied volatility is higher than the historical volatility to a certain extent, or the implied volatility of a certain exercise price significantly exceeds the implied volatility of other exercise prices, it will This can be considered excessive deviation, meaning that the option is overvalued. Although the calculation of volatility is complicated, option quotation systems and related option investment websites usually provide real-time volatility data or option calculation tools for reference. If the option price is more than 25% higher than the option reference theoretical value calculated based on volatility, the option may be overvalued.
Seller’s Mindset Article 7: Sell more out-of-the-money options
Option sellers should first choose options that have no intrinsic value but only time value, that is, the exercise price is higher than the stock market price. A call option or a put option with an exercise price lower than the market price of the stock. Compared to at-the-money or in-the-money options, out-of-the-money options are less likely to be exercised, and this low probability is the advantage of option sellers. The famous American fund HVPW (High Volatility Put Option Selling Fund) maintains the annual return rate above 9% by rolling out out-of-the-money put options with a remaining period of about 60 days and an exercise price that deviates from the market price by 15%.
Article 8 of the Seller’s Mindset: It is better to sell puts than to buy stocks
Coca-Cola is one of Buffett’s most successful investments, in which Buffett used the method of selling put options to increase investment. profit. For Buffett, there is already a desire to continue to increase his holdings of Coca-Cola. If Coca-Cola does not fall, then the royalties are additional income; if the stock price falls, then the royalties are equivalent to the market subsidy for Buffett's cost of purchasing Coca-Cola. Therefore, for long-term value investors, buying stocks by selling put options is an investment method that reduces the cost of buying stocks.
Seller’s Tips Article 9: Opening a covered position is not easy
Investors often have this problem: they have been optimistic about and held a stock for a long time, but recently the stock has been tepid. It's not hot, sometimes it rises a little, and sometimes it doesn't move at all. Is there a way to appropriately increase income or reduce holding costs while holding stocks? The answer is: yes! This is a covered opening, which means selling a corresponding number of call options while holding the stock. The BXM fund in the United States was created based on the covered opening strategy of the S&P 500. Over the past two decades, BXM has produced higher returns (annual return of 9.4%) relative to the S&P 500 with less risk, which is the dream of all strategic traders. It can be said that the logic of opening a covered position is simple but the effect is not simple! Of course, opening a covered position also involves risks such as rights being exercised and stock prices falling sharply. Investors should transfer or close positions in a timely manner.
Article 10 of the Seller’s Mindset: Diversify Risks
In the U.S. options market, about three-quarters of the options are worthless at expiration, which means that the option seller’s The winning rate is much greater than that of the buyer. At first glance, selling options seems to be a shortcut to making money. However, once there is a big fluctuation in the market, there are always option sellers who will be liquidated. This risk characteristic of option sellers is very similar to that of selling insurance. Most policies are renewed every year without any risk, but a major disaster may cause the insurance industry to suffer considerable losses. Therefore, most insurance companies spread their risks across different regions and insurance products. Similarly, option sellers should also sell options on different stocks to diversify risks and avoid being wiped out by adverse moves in a single stock.
Article 11 of the seller’s mentality: Make full use of collateral
When opening an option sale, you need to pay a deposit. The margin can be cash or securities such as bonds and stocks. The seller should try to use marketable securities to offset the margin. Compared with using cash, using treasury bonds, monetary funds, etc. as collateral can get an additional 2%-5% income while collecting option premiums. Why not!
Article 12 of the seller’s mentality: mark the market, mark the market, mark the market again!
The risk of selling options is higher, and sellers must keep a close eye on market trends and pay attention to market shocks.
In addition, option sellers should always pay attention to the margin situation in their accounts, pay close attention to ex-rights and dividends, allotments and dividends of related stocks, and be prepared to top up the margin in advance.