I love selling premium, and in certain market conditions this is one of the best strategies for making money in the stock market. What are we talking about here? It’s all about options, and when we look at trading on the surface, it’s a simple zero sum game – one side wins while the other side loses.
Yet, that would be the end game, when options expire at expiration. We can certainly have winners and losers on both sides at any point in time prior to option expiration, and that is often the case.
We often talk about selling option premium in front of a holiday, as the decay factor works in our favor. Given the upcoming three-day holiday for Good Friday/Easter there is a great chance to take advantage, but what would be the best strategy?
In a falling, or low volatility, environment I will often sell put spreads, which garners me the premium of a spread but also defines my risk in case I am wrong. Further, I can wait out the trade up until the very end, which is counter to a premium buyer – who is looking to exit as quickly as possible in order to avoid the decay problem (options are a wasting asset and time decay is built into the price of the option, countering the great leverage of derivatives).
Selling equity options is usually my preferred play. I may look at selling some put spreads on IBM, GOOGL, AAPL, FB or TWTR, where implied volatility may be elevated and looking to come down. I will look at the week following the holiday, which for weekly options is April 10th, but for monthly options, it would be the following week.
For bearish plays we will consider selling call spreads, looking for stocks to stay in place or drop. In a lower volatility environment selling index calls (SPY, IWM, QQQ) is ideal.
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