Casinos have the odds stacked in their favor. Some people get lucky and win more than they lose, but casinos know that over the long term they will make money. That's their edge. Our edge is the same. As option sellers we can stack the odds in our favor.
I view myself as a casino owner. Well, maybe not the owner because I don't own the stock exchange. But I do play the role of the "house". With close to 80% of all options expiring worthless, option buyers are basically gamblers looking to buy a lottery ticket. And I don't mind selling it to them.
Now keep in mind, that sophisticated traders also use options to protect their other investments but we can sell options to these guys too. That's why I say you can own a casino.
What I like to do is sell out of the money options. There are three types of options when it comes to price. In the Money, At the Money, and Out of the Money. An example will help clarify things.
IBM is at $50. An At the Money Call option would be the one with the $50 strike price because that is where IBM is right now. If IBM expires today, this option would be the closest to making money.
All of the Call options with strike prices above $50 are Out of the Money. So the 55, 60, 65, 75, and 100 are all out of the money. These have no value except for time value (because they have time before they expire).
All of the Call options below $50 are said to be In the Money. Such as the 45, 40, 35, etc. If IBM expired today, the people owning these options would exercise them to buy IBM stock at lower than market price.
In the last lesson, I mention the Iron Condor trade. With the Iron Condor we sell options that are way out of the money. I use my statistics and probability calculations to decide exactly which options I want to sell. Because the options we sell are Out of the Money we receive less premium (money) for selling these options because the risk is less. You can also sell At the Money and In the Money options for a lot more money, but you would also lose a lot more often. Selling Out of the Money is the way to go in most cases.
The people who buy the options I write are gambling that IBM will get to the strike price I sold. If it does, good for them, I will just adjust my trade to protect myself. It if doesn't I keep the entire amount I was paid for the option.
Choosing the right option to sell is the tricky part of option selling. Sell the wrong one and you could lose a bundle. Anyone can understand how options work and start selling them, but knowing which ones to sell and then how to adjust the trade when it goes against you is what I help you with. That's one of the reasons my members pay me: to watch over their trades so they don't have to.
It's great to have someone on your team that knows what he is doing in good and bad markets.
When I first started this, I didn't know what I was doing. I lost over $5,000 on just one trade selling APPL options. If I had someone with me whose shoulder I could watch over or bounce trading ideas off of, I would not have lost so much money.
At first I thought I just got unlucky, so I sold options on FXI, but then lost another $6,000. I lost on other trades too, until I figured out what I was doing wrong. It was a very expensive education. Putting on the trades is the easy part. Adjusting the trade when it is in trouble is where the professional traders separate themselves from the amateurs.
I have seen an amateur trader and a professional trade put on the same exact trade on the same day, but in the end, the amateur trader lost money on the trade while the professional made money.
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