Selling options is a good way to make consistent money trading the stock market, but there are some mistakes that many option sellers will make, particularly when they have just started out.
It is really easy to forget about risk management when you’re winning the bulk of your trades. But you still need to take account of risk management when you sell an option; otherwise you might wake up one day and to discover that all of the profit you made in the last 6 months of selling options vanished in a single day.
Some of the brokerage firms that helped pique American’s interest in stocks are now luring them into something much riskier: stock options. As the stock market soars to new heights, E*Trade, Ameritrade and Charles Schwab are advertising the potential rewards of options, which give buyers the right to buy or sell stocks at predetermined prices in the future. Options, like their cousins, futures, have traditionally been the domain of Wall Street traders. But the brokerage firms say futures and options can …
You can buy a call option on the stock a couple months out with a strike price of $65. Once you have done that you can sell front month options using the same strike price and profit as the stock doesn’t make any big moves.
Trading how does selling options make money
So say you buy a phone call with a $65 strike price 3 months out for $8. Now you sell the front month call on the same stock for $4. Initially you would be negative but if the stock doesn’t make a big move over the next three months you’ll be in a position to sell another option 2 more times.
Another thing you can do is to have a max loss level that you would get out of to limit your loss in a worst case scenario. This way you lower your loss when you’re wrong.
It is likewise easy to sell options without having any clue as to why. You still need to have some kind of trigger when selling; otherwise it can affect how often you’ll make money on a trade. This could hurt your way forward in the long run.