Buying Options or Selling Options

Focus: STOCKS

Juan Sarmiento Image Juan Sarmiento Independent Trader, putcallgenie.com

Your job is to time your entry by waiting for a correction, opposite to the trend, and enter your trade when the stock price shows signs of resuming its trend, says Juan I. Sarmiento, DVM, Ph.D., President and Founder of PutCallGenie.

Ten years ago, I was asked if selling options was really the right approach because most professional traders will tell you, that is how they trade. I did not know the answer at the time. I had been mostly buying options as a substitute to stock buying, during the .combubble. The question stayed with me and I think I finally have the answer, and it is not a short one (no pun intended).

Option selling is based on probabilities. If you sell a put when you are bullish on a stock, you are most likely to make a profit of some sort. Your probability of making at least $0.01 is about 60%, depending on the option’s strike price relative to the current market price, the option’s time to expiration and its implied volatility.

If you are a professional trader, you can afford to have dozens of trades at a time, and just like Mendel’s pea counting, the more the number of occurrences, the closer you will get to your estimated probability (60%).

The goal is that, at the end of the year, you will have a good profit, regardless of the ups and downs of the market, or your ability to pick the right direction.

For the rest of us (retail traders), it is not so simple.

Even if you are fortunate enough to have a good amount of capital and are financially independent, you may not want to have to work at trading as if it was your full-time job.

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