Selling Premium in Volatile Markets

11/29/2011 9:25 am EST

Focus: OPTIONS

Carley Garner

Senior Strategist and Broker, DeCarley Trading, LLC

Selling option premium in volatile conditions is an increasingly popular strategy, and for good reason, says Carley Garner, explaining how selling options can put the odds in your favor.

How should traders take advantage of volatility in the options market? We’re talking to today with Carley Garner, and you have spoken in the past about that very topic. Give us your thoughts.

I happen to be an advocate of option selling. It’s not necessarily the most popular strategy out there. You hear a lot of horror stories, and it’s absolutely true. As an option seller, you’re accepting unlimited risk for limited reward, but in the long run, we’re looking at probabilities.

The premise of being a successful trader is beating the odds. Everybody is competing against each other, and the only way that you’ll ever make money in the long run is to put the odds in your favor. I think option selling does that.

In highly volatile times like we’re in, it can be a tough environment for traders that are already short options when volatility explodes, but for those lucky enough to have enough cash on the sidelines to take advantage of the opportunities, you can sell tremendously out-of-the-money options for big premiums.

It’s definitely not risk free, but it’s something that you can sleep at night knowing that soybeans probably aren’t going to $20, or they’re probably not going to $5 either, but you can still catch some premium there.

So, give us some tips for a new options trader.

Again, I’m going to go back to patience. Patience is really the thing, especially with an option seller.

A lot of option selling courses and programs teach you that timing isn’t everything. You’re selling premium, you’re selling time, so just put the trade on, strangle the market, and hope nothing bad happens. That’s the exact opposite of the way I look at things.

I’d rather be on the sidelines getting ready to take advantage of some sort of explosion in volatility knowing that if you’re on the sidelines, nothing can go wrong. You can’t lose money on the sidelines.

So, the more that you’re on the sidelines, the less chance you have for being in the wrong place at the wrong time. That’s really the one thing that kills the short option traders is just being in the wrong place at the wrong time.

Now, coming back to the question of volatility, and as you noted, the markets have been extremely volatile lately. Does that frighten a lot of traders unnecessarily perhaps?

It does frighten a lot of traders. I would probably say they should be frightened. The volatility that we’ve seen in August and September of 2011 has been incredible. I’ve been a broker for seven years, and aside from the chaos in 2008, this is probably as wild as I’ve seen the market.

So, it’s times like this that maybe beginning traders should take a step back rather than trying to be a hero. They see all these crazy market moves, and they think, “Well, look at all the money I’m missing.” Really, you shouldn’t look at it like that. Again, if you’re on the sidelines, you can’t lose money.

So essentially, if a trader is to capitalize on the volatility, you should really be an experienced trader before you try to do that?

Yes. I would say even the more experienced and even the best traders out there are probably challenged during this period.

So, as a beginning trader, I’m not saying stay away and don’t trade. I’m saying take it easy. You really don’t want to get overly excited and overly involved.

Makes sense. Now, what are some of the signals you would be looking for in a volatile market that it might be time to jump back in?

You know, normally when all of the hype is gone. If you can turn on a business news station and you’re not seeing protestors in Greece, and people with blood on their face, and complete chaos.

People are emotional…I wouldn’t say there are no fundamentals, but fundamentals don’t really matter in times like this. People are trading on emotion, and it has nothing to do with supply and demand or what could or should be. So, in times like that, it’s better to be safe than sorry.

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