Option Selling

Option selling can be one of the most consistent ways to pull money out of the stock market. It can bring cash flow every. I’ll show you how powerful option selling can be.nn First you have to understand what an option is. When you buy a put option you buy the right to sell a given stock, at a set strike price, on or before a given day. For example if you buy the DEC $45 put for stock XYZ for $3, you would have the right to sell XYZ at $45 by the 3rd Friday of December. If stock XYZ was at $30 by expiration you could buy it at $30 and sell it at $45.nn Sounds powerful and it is. But to make money as an option buyer you have to predict what the stock will do. If it didn’t move down to $30 but up to $46 your put would expire worthless. You would have lost your entire investment of $3. Option buying can be a dangerous game. In fact 80% of options expire worthless. Professional option buyers may have a string of losses before they make their one huge gain.nn So, let’s review. Options are the way to get leverage. But the options expire worthless 80% of the time. So, how can you make consistent money with option? Think for a second. If option buyers are losing money 80% of the time someone else must be making money 80% of the time. That money has to go somewhere. nn Where does the money go when option buyers lose it? It goes to option sellers. What if we liked XYZ. It is trading at $52. We believe it will go higher. So we sell the $45 DEC put for $3. Now we made an instant $3. We also have the obligation to buy the stock at $45 if it goes lower. Now how can we make money? nn If the stock goes up which we think it will, the option expires worthless and we keep $3 profit. If the stock stays at $52 the option expires worthless and we make money. If the stock comes down to $46, I’m pretty sure you know what I am going to say, you make money.nn Now, how can we lose? If the stock comes down to below $45 you can lose money. If it comes down to $30 you would have to buy this $30 stock at it at $45. That is a lot of risk. This is why most option sellers will also buy the $40 DEC put for $1. This way you only make $2 from the trade if you are right, but if the stock goes down to $30 you can buy it at $45 and sell it at $40. You would only lose $5.nn Option selling can be a nice way to make money, but you still must position size and use technical indicators to help you find your entry and exit points.nnFor more information on how to make money in the stock market visit http://www.stocks-siplified.com n