After trading for 9 years I’ve learned some valuable lessons on buying options versus selling them.
I like to think of selling options versus buying them like a casino. When you go to a casino you spend money to gamble. That’s similar to buying call options. You pay for them and you cross your fingers.
Now with selling options you collect premium up front! You have a defined reward and a defined risk. It doesn’t get better than that.
When it comes to trading, everyone has different priorities and preferences. Some traders are comfortable with taking big risks in order to chase potentially high returns, while others prioritize certainty and consistent profits over the potential for big gains. Personally, I fall into the latter camp. I prefer to take a more conservative approach to trading, focusing on strategies that offer a high probability of success and a steady stream of income. For me, the peace of mind that comes with certainty and consistency is more important than the excitement of chasing big wins. Plus I really do use my portfolio income to fund my travel lifestyle and expenses.
Here are my top favorite strategies for collecting income and selling options.
- Covered Calls This involves selling a call against 100 shares of stock you already own. This is a moderately bullish strategy that generates income. Covered calls are a popular options trading strategy that can be used to generate income while also limiting downside risk. The strategy involves selling a call option against a stock that you already own. By doing so, you are essentially giving someone else the right to buy your shares at a certain price (the strike price) by a certain date (the expiration date).If the stock price stays below the strike price, the option will expire worthless and you get to keep the premium that you collected from selling the option. If the stock price goes above the strike price, the option will be exercised and you will be obligated to sell your shares at the strike price. While this means that you miss out on any additional upside above the strike price, you still get to keep the premium from selling the option, which can help offset any losses.Covered calls are considered a moderately bullish strategy, as you still own the underlying stock and can potentially profit from any increases in the stock price up to the strike price. However, the strategy does cap your potential gains, since you will be obligated to sell your shares if the stock price rises above the strike price. Nonetheless, covered calls can be an effective way to generate income from a stock that you already own, while also providing a degree of downside protection.There’s also one more thing about covered calls I want to tell you about, which makes this strategy even more versatile and safe.One thing that most people don’t know about covered calls is that they can be used in a variety of market conditions, not just when the stock market is bullish. While covered calls are often thought of as a moderately bullish strategy, they can also be used in sideways or even slightly bearish markets to generate income.
- Selling Puts This is a great strategy for entering into a stock. When you sell a put you collect income and are obligated to buy a stock at the strike price you sold. The amazing part is if you don’t mind getting put a stock, then selling puts is the best way to enter a stock and get paid for it!Selling puts is another popular options trading strategy that can be used to generate income while also providing a way to enter a stock at a lower cost basis. When you sell a put option, you collect income upfront in exchange for agreeing to buy the stock at a certain price (the strike price) if it falls below that price by the expiration date.If the stock price stays above the strike price, the option will expire worthless and you get to keep the premium. If the stock price falls below the strike price, you will be obligated to buy the stock at the strike price, but you get to keep the premium from selling the put option. If you don’t mind owning the stock at the strike price, then selling puts can be an effective way to enter a stock and get paid for it.One advantage of selling puts is that it allows you to enter a stock at a lower cost basis than buying the stock outright. If the stock price never falls below the strike price, you still get to keep the premium, which can help offset any potential losses. If the stock price does fall below the strike price, you can either hold onto the stock or sell it for a profit, depending on your investment goals.However I recommend you watch my video on the wheel strategy. $5,000/Month Wheel Strategy Option Trading
In fact, I bet you didn’t know this but Warren Buffett is secretly an option trader. It’s true that Warren Buffett has used options trading in his investing strategy, particularly selling put options. In fact, during the 2008 financial crisis, Buffett made a substantial profit by selling put options on several large American companies, including General Electric and Goldman Sachs.
Buffett’s strategy involved selling put options with strike prices that were lower than the current market price of the underlying stocks. By doing so, he was able to collect premiums upfront and potentially acquire these stocks at a lower cost basis if the market price of the stocks fell below the strike price. If the stock price did not fall below the strike price, Buffett got to keep the premium as profit.
While Buffett is primarily known for his value investing and long-term buy-and-hold strategy, his use of options trading demonstrates that he is not afraid to incorporate other investment tools into his approach. As an experienced investor, Buffett likely recognized the benefits of selling put options, such as generating income and acquiring stocks at a potentially lower cost basis, while also mitigating risk.
Both selling puts and selling covered calls are strategies I used during my journey to growing a 7-figure portfolio. These strategies are usually not the highest reward, but for me I am completely fine with consistency over volatile swings. I prefer to make $1,000 every day than make $2,500 one day and lose it the next. If you want to get consistent with your trading make sure you checkout the video link to the wheel strategy I posted above.