Stocks are set to close the week in an uneventful fashion. Which is somewhat expected after such a strong rally last week (best weekly gains of 2019).
The market is still plagued by uncertainty surrounding the upcoming FOMC announcement and the G-20 Summit (some hope the U.S. and China can strike a trade deal during the event).
But believe it or not…
The VIX (the market’s fear index) is hanging around 16, a sign that traders are getting comfortable. If you recall, it got as high as 36 last December when stocks were crashing…
…and above 20 last month when trade war fears were at its highest…
Now, if you’re an options trader, then you know volatility matters. That said, if we start to experience a sideways or even dull market, then I’ll be ready.
For example, instead of playing for the big move… I’ll be playing for the move that doesn’t happen… and get paid handsomely for it.
(Chicks dig the long ball selling options premium offers a higher probability trade, and I plan to utilize more of going forward. Not a WMM client? Change that now.)
In other words, the options market allows you to play the role of the casino and expect “sucker bets.”
The beauty behind options selling is:
- You can make bets on where you think a stock will or won’t go and get paid for it
- It’s perfect for stocks that are consolidating or trading sideways
- You can even setup trades so that they are “non-directional”
- Works in all market conditions
- It’s easier to know your targets and exits
That said, there is a ton of common mistakes traders are making when they first dive into selling options premium.
For the most part, I’ve been going over long options strategies… buying calls when you think a stock can go up… buy puts when you think it’ll go down.
Well, what happens if I told you there was a better strategy depending on the market condition?
I know what you’re thinking, “Jeff, why didn’t you tell me about this earlier?”
You see, we’ve been having very volatile periods… and when markets are moving a lot, this strategy might not work as well… and that’s when I’ll just look to my money pattern trades and focusing on the macros and the Fed.
What I’m talking about is selling options.
You’ve probably heard me say shorting options can be dangerous… and they can be if you don’t know what you’re looking for… and especially when you don’t know when to use it.
That said, let’s take a look at the advantages of selling options, and why it might be time to implement this strategy.
The Advantages of Selling Options
For the most part, this strategy works well in “boring” markets… what I mean by that is the markets have been a roller coaster ride… and over the last two weeks, it’s just gone straight vertical.
With such a move, the market could hit a wall here, and might just trade in range with the summer coming up.
In other words, when there is a lot of back-and-forth trading… up today… down tomorrow… with the market not really finding a clear direction, selling options could be advantageous.
Well, that’s just the way options work. Since they derive their value from the stock price… options prices get evaporated.
You see, if the stock isn’t moving… options actually lose value over time.
Instead of making bets on where you think a stock might go during dull markets… you can make bets on where you don’t think the stock can land… and you don’t need to be “as right” to make money.
When you buy options, the value of your options will only go up if the stock goes up or the implied volatility spikes (If you don’t know what implied volatility is, make sure to refresh your memory by reading 30 Days to Options Trading).
However, when you short options… if the stock doesn’t move and just stays in range… or moves to your favor (if you short calls you want the stock to not move up a lot and stay below the strike price… if you short puts, you want the stock to stay above the strike price or move higher.)
For the most part, I stick with shorting puts because selling calls can be very dangerous (we never know how high a stock could really go).
Increasing Your Odds
Now, some traders hate dull markets, but I love them… all market conditions in fact. You see, when markets are sideways, it’s actually exciting for short options trader. It’s like legally being allowed to be the casino and stack the odds in your favor.
Here’s what I’m talking about here… and the math is simple.
When you BUY a call or put, your odds of winning are around 40%. In other words, when you buy options, you’re only going to make money roughly 40% of the time…
The options market is a zero-sum game. There is always a winner and a loser on every trade… so why not take a stab at the other side of the trades sometimes?
Your odds are now increased to around 60%… better than your odds at the blackjack table.
There are many ways to structure your short options trades… and I’m going to go over some case studies.
ROKU Case Study
Now, Roku Inc. (ROKU) has been one of those stocks that has been on a remarkable run.
Here’s a look at the hourly chart in ROKU.
Well, a few weeks ago, ROKU was hit with a downgrade by Stephens analyst Kyle Evans… citing the downside of the risk-reward.
However, I knew this was a momentum stock… and figured buyers will be using this dip to get in on the hot stock.
Now, the options were very expensive to buy… and I didn’t want to take those odds. So what did I do?
I ended up selling puts. When you sell puts, you’re simply betting the stock will not get below a level… I figured ROKU would get back above $90 and stay above it… which it did. When you short options… you collect the premium upfront…
… when the stock stayed above $90, here’s how my PnL was looking.
Those options expired worthless as the stock closed above $90.
I’ve actually used this strategy another time too… in another hot initial public offering (IPO).
LYFT Case Study
Here’s a look at Lyft Inc. (LYFT) when I traded the options.
The IPO wasn’t as hot as people thought it woud be… and actually sold off and traded below its IPO price.
Here’s what I sent out to Weekly Money Multiplier clients.
Now, rather than buying $50 call options… which would’ve been expensive. I actually placed a bet that the stock wouldn’t break below $50 by selling put options… all the stock needed to do was stay above $50… and it was at $62.
Well, here’s a look at what those profits looked like.
(Think alerts like these could boost your trading performance? Click here to get started.)
Now, you might be thinking Jeff, is this the only way to sell options?
One of my favorite ways to sell options is by trading spreads.
Basically, this allows me to reduce by risk.
If you use a call spread, you sell calls at some strike price A and buy calls at strike price B.
Here’s a look at an example.
With this trade… I sold the $286 call options expiring on May 24… and simultaneously bought the $287 call options.
As you can see… even though the $287 calls ( the long options position) was down money… the $286 calls (the short options position) was up money.
My risk here was defined.
Here’s a look at the risk profile of the strategy.
If the SPDR S&P 500 ETF (SPY) broke above $287 (strike price B)… I have defined risk.
Now, if SPY stayed below $286 (which it did) at the time – strike price A… I would be at my maximum profit potential. Basically with this trade… you’re betting the stock will be at or below a level.
I think with the market showing no signs of a clear direction right now… these strategies will be extremely beneficial to my trading… and I’ll be sure to alert Weekly Money Multiplier clients above my next moves.
If you want to learn more about shorting options and potentially making money in dull markets, as well as receive real-time text and email alerts from not only myself, but Nathan Bear too, and so much more… click here to get started.