Pop Quiz.

Did you know that buying options puts you at a statistical disadvantage?

Option sellers ALWAYS start with an edge over premium buyers.

Otherwise, there wouldn’t be any sellers!

When I realized this fact, my world turned upside down.

That’s why I want to share with you my favorite option selling strategies— from basic spreads to complex strangles.

If they sound foreign to you, that’s okay.

It took me some time to learn and implement these strategies to my repertoire.  

But I’ve learned some shortcuts that I believe can make the learning process easier for you.

Pretty soon, you’ll be teaching your friends how to create these high probability trades!

The Unprofitable Trader

Problem - Never sold an option before

I know people that traded for years that never sold an option. They prefer to buy and sell stocks. Most of them avoid options because they don’t know how.

The easiest way to start selling options is with the credit spread. It’s a defined risk trade that I use all the time.

Solution - Learn the basic credit spread

Let’s start with the fundamentals. Credit spreads come in two forms: calls and puts. They’re also known as vertical spreads.

You sell a credit spread as follows:

  • Sell a call (or put) option at the money or out of the money
  • Then buy the same number of contracts with the same expiration on the same underlying stock at a higher (or lower) strike price.
  • You receive a credit (payment) for the trade, known as the premium
  • The maximum payoff occurs when the stock finishes below the lowest strike at expiration for call spreads, or above the highest strike for puts spreads.
  • The maximum loss is the difference between the strike prices less the credit

Here’s how this might play out with AAPL.

  • I sell a $300 call option on AAPL that expires in 21 days.
  • I receive $2.00
  • I buy the $305 call option on AAPL that expires in 21 days
  • I pay $1.00
  • My net credit is $2.00 - $1.00 = $1.00 per contract
  • My maximum profit is $1.00 per contract x 100 shares = $100
  • My maximum loss is $305 - $300 - $1.00 = $4.00 x 100 shares = $400

This is what the payout diagram looks like for a call credit spread.

A put credit spread flips it on the y-axis.

Here are the keys to making this trade work:

  • The further out-of-the-money you go the higher your chance of success, but the worse risk to reward.
  • The more time until expiration, the more premium you receive.
  • Ideally, you don’t want to go out more than 30-60 days for a spread trade.
  • You can always (and often should) close the trade out at 30%-50% of maximum profit.

The Breakeven Trader

Problem - Want to move beyond verticals

Let’s say you’ve become a spread head. You think you’re pretty slick and understand how they work well. But you want to add something more that has a high probability of success but little management.

Solution - Try Short Iron Condors

Short iron condors are a simple trade that can get you win-rates in excess of 80% when done correctly.

A short iron condor combines a put credit spread and a call credit spread. Imagine the payout diagrams of those two slammed together. It would look something like this.

Here’s the cool part about short iron condors - you can’t fail on both sides at once. If the stock crosses the put strikes, then the call spread will get full profit and visa versa.

The setup is the combination of a put and call credit spread. I’ll use AAPL as an example again.

  • I sell a $300 call option on AAPL that expires in 21 days.
  • I receive $2.00
  • I buy the $305 call option on AAPL that expires in 21 days
  • I pay $1.00
  • I sell a $290 put option on APPL that expires in 21 days
  • I receive $2.00
  • I buy a $285 put option on AAPL that expires in 21 days
  • I pay $1.00
  • My net credit is $2.00 - $1.00 + $2.00 - $1.00 = $2.00 iron condor
  • My maximum profit is $2.00 per contract x 100 shares = $200
  • My maximum loss is $305 - $300 - $2.00 = $3.00 x 100 shares = $300

So here are some tricks to getting the most out of this trade.

  • Try to make the credit you receive 1/3rd of the distance between the strikes.
  • In this case $5.00/3 = $1.67
  • Look for situations where the implied volatility is high relative to the last year.
  • Try to avoid earnings.
  • Look to take profit at 50% of the maximum payout.

The Profitable Trader

Problem - Want higher payouts from trades

Let’s say you’ve mastered all there is to know about spread trades, and you want to take it to the next level. Some of the best traders use short strangles. Essentially, these are uncapped short iron condors.

It’s not something recommended for newer traders because you can lose a lot of money quickly if you don’t know how to manage risk

Solution - Prepare for the short strangle

Short strangles work like short iron condors without the upper and lower strikes in the credit spread to cap your risk.

This is a basic payout diagram.

Let’s take the previous example with AAPL.

  • I sell a $300 call option on AAPL that expires in 21 days.
  • I receive $2.00
  • I sell a $290 put option on APPL that expires in 21 days
  • I receive $2.00
  • My net credit is $2.00 + $2.00 = $4.00 per short strangle
  • My maximum profit is $4.00 per contract x 100 shares = $400
  • My maximum loss is potentially unlimited

The last point is the most important. You have to be on top of these trades to manage your risk. This means a clear understanding of statistics and risk management.

Even with as comfortable as I am with trading, I never use these trades. However, I know plenty of traders that make good money with this strategy. They leverage deep knowledge of statistics, option greeks, and risk management.

My favorite - the credit spread

I love using credit spreads because they are simple and effective. They’re one of the keys that helped me turn my trading around along with my TPS setups.

You can learn exactly how I leveraged these option strategies to turn my $38,000 account into over $2,000,000 in my free webinar.

Click here to learn more.