Buying Options or Selling Options

Focus: STOCKS

Juan Sarmiento Image Juan Sarmiento Independent Trader, putcallgenie.com

Some of us may like our non-trading work or job and feel that we make a contribution to society with our profession or talent.

Personally, I contribute to the biotechnology industry as a pathologist. Yet trading is one of my passions. I have been trading options since the early 1990s. Since my beginnings, I have always preferred to be net long options, although I do take advantage of the decaying nature of options. In future articles, I will reveal my favorite options trading approaches, but for now, I'd like to focus on the basics.

As a retail trader, I started as a stock buyer and converted to options because of the characteristic leverage of options after I discover a certain “set-up,” that is, a typical price chart formation that often resulted in a strong rally.

Yes, back in the 90s when the internet was in its infancy, I selected a watch list of 30 stocks in intermediate bullish trends. And then I patiently waited for a pullback corresponding to the Fibonacci ratios (38.2%, 50% or 61.8%) of the previous rally, aided by an oscillator to find the buying signal to time my options trade.

Without a doubt, this is a system meant for bullish markets, which is all I knew until 2001. This strategy is illustrative of what a retail options buyer might do that the professional will not. The professional wants to trade all the time, and the options buyer waits for the right opportunity and might enter one trade a week or less.

So now I believe that there is no inherent advantage of sellers over buyers, it is just a matter of honing on a set of skills necessary for success. When it comes to options selling vs. buying, you are trying to find your own balance between risk, reward, and the probability of profit.

If you buy an option, your risk is low, your reward potential is large, but your probability is low, as in a lottery ticket with high rewards in a few trades.

If you sell an option, your risk is high, your reward is limited, but your probability is high, which will make you a frequent winner with the occasional, large losing trade.

Join Juan at a Live Event

Las Vegas

 
Clicky