Rule 4: Embrace your other best friend: volatility
Selling options on slumping stocks is only part of the fun. You can also profit from directional moves. Unlike the traditional buyer, who needs a big, one-way move, sellers are uniquely positioned to profit from movement in either direction.
Many “snoozy” stocks have highly volatile option chains (like Citigroup (NYSE:C)). Bigger volatility means bigger premiums for option sellers. You want options with some bounce — that is, volatility in the 25-35 range.
To get the fattest-possible premiums, you sell when volatility is at the higher end of that range and cash out when volatility contracts.
This is another way buyers get creamed – they buy and watch their option value plummet overnight, simply because the wind went out of their option’s sails … and blew the sellers’ way.
Rule 5: Run the bases for slow-motion, safer home runs
Option buyers don’t get rich from buying options. Sure, they can get the occasional big winner, but it’s usually canceled out by a bunch of losers.
Option sellers aren’t going to get rich overnight, either. But their winning average is far-more-impressive. Over time, a few dollars earned here and there can add up to a pretty nice chunk of change over time, especially when it’s reinvested.
The secret is to keep your monthly goal in mind at all times. And to not only identify target prices on your options, but also to set automatic buyback orders at 30% to 50% profitability. Buyers get caught up in guesswork and emotions, whereas sellers benefit from avoiding the fear and greed that plagues their buyer counterparts.
Bonus Rule: Don’t hope for returns — make them and keep them!
Yes, buyers know their risks before getting established. But so do sellers! Better yet, sellers are net-cash-positive from day one, and they keep that money and have it earning interest in their accounts.
The big disadvantage to buying is that you can lose all your money in one lousy trade. Sellers are far more realistic and disciplined in their expectations and trade management. Once you’ve “won,” which you do right away, you strive to keep the bulk of those returns.
Sure, sellers can have shares “called away” or “put” to them. But if you keep your options out-of-the-money, manage your expectations and adhere to profit targets, you can stay ahead of the market and be safer than your “buyer” counterparts. In fact, your only real risk is foregone profit!