Join the thousands of option traders that are cashing in on the options trading explosion. Learn the use of stock options as an investment tool to achieve steady, consistent returns in up and down markets.
Twenty one page ebook explains how to become an option seller and teaches how a disciplined program of selling options will surely and definitely grow your capital or give you a comfortable second income. Use my option selling system and earn 30% to 60% annual returns!
THE MECHANICS OF OPTION SELLING
80% OF STOCK OPTIONS EXPIRE WORTHLESS!
Statistically, and this is a well-known fact, 80% of all options expire worthless. Most options decay to the point of no value at expiration. If 80% of options lose value at expiration, it stands to reason that those who sold them made money! This is absolutely correct! Option sellers, or option writers as they are more commonly called in the industry, make money when the options they sold are not exercised by the option buyer on or before the expiration date. The option writer makes money by patiently waiting for the option to lose its value due to time decay. As an investor employing the technique of selling options you will place yourself in the shoes of the option seller and take advantage of this statistical fact. Based on this you may therefore conclude that most of the options you sell will decay and be winners at expiration and, the premiums you collected will accrue to you as profit. Now isn’t that a beautiful statistic working in your favor?
ODDS ARE STACKED IN YOUR FAVOR!
As you know there are three ways a stock may behave. Its price may go up, it may come down or, stay flat and not move at all. The options tied to the stock follow the same actions. Of these three, the option writer is a winner in two. If you are a put seller and the stock to which your options are tied to go up in price or stay flat you will be a winner. You will be a loser only if the stock’s price drops to a level below your strike price. In many cases, even when the stock goes down in value (if you’ve written puts) but it does not drop low enough to hit your strike price, you are still a winner. For this reason many option players add two more stock behaviors for a total of five. These are: the stock or option may stay flat, it may rise a little, it may rise a lot, it may drop a little, it may drop a lot. Of these five, assuming you are a put seller, you are a winner in four and can only lose money if the stock price drops a lot. You are a winner even if the stock drops a little giving you winning odds of four out of five situations!
In their book, “The Complete Guide To Option Selling”, which is a highly recommended reading, the authors, James Cordier and Michael Gross, present a very good analogy of options selling. I'm reprinting a slightly edited version of their write-up about the analogy of option selling as it relates to going fishing in a fishing hole loaded with catfish and bass. It may be a bit lengthy but it presents a perfect example of how the options market works and how the option seller profits from the market’s operations. It actually makes for an amusing reading and if you would like to take the time to go through it you will find it here.
In his book "The Complete Option Player" Kenneth Trester, one of the foremost authorities on options, has this to say: "To the option player, option writing is the Cadillac division of the options market. The profit potentials are greater than in any other segment of the options market. The option writer can generate from 50% to a 100% return annually on his investment, and normally can do this consistently over a long period of time."
Trester offers a similar analogy illustrated by James Cordier and Michael Gross but using a casino instead of the fishing hole. He says: The casino operator backs the bets of the gaming customers. He pays off when the customers are big winners; he takes in the profits when they are losers. The casino operator has a slight advantage in each game. In the game of roulette, for instance, he has approximately a 5% advantage over the gaming customer. The option writer is in a similar position, but his advantage is better than 5%. The option writer (seller) actually has approximately a 10% to 20% advantage over the option buyer. The option writer, like the casino owner, provides the option buyer with a market in which to speculate, in which to gamble. For this service, the option writer receives better odds.