As the equity markets take a brief pause for the Good Friday/Easter holiday there are some great strategies to take advantage of during this time off. One of the better strategies I use is selling premium for puts and calls. This action allows me to collect a premium and let the time decay three days with no activity work in my favor. Come Monday these option premiums will come down, and when 80% of all options expire worthless, why not be on that side?
Time Is the Enemy
As a buyer of options we fight the clock, time is the enemy. However as a seller of premium time is our friend, as it erodes option premiums. If we collect the premium before a weekend or a major holiday our odds increase of keeping the premium before expiration. Options are a zero sum game (for the most part) if the seller is on the winning end; the buyer is clearly on the other.
Market volatility is low here, the VIX is closing the week under 13%. Yesterday’s action was typical in front of a long weekend – volatility sold. As for options, I like selling premium into a long weekend – both put and call spreads, which allow me to participate but with time rather than direction. As a put seller, I want to see the stock stay where it is or move up, as a call seller I want to see a stock move down or stay where it is.
The beauty of equity options (American style) is that I can close these out early or let them run to expiration – it is my choice. I will often let the decay work in my favor until about 80% of the premium has eroded, then buy back the option or spread. Think about trying this on the next holiday.
