If you’re reading this, you’re at least interested in learning more about options–in particular, option selling. In this post, I’ll make the case that selling options is for almost every type of investor out there, including you!
I’ll assume that there are only 3 types of investors:
- Long-term growth investors
- Long-term dividend investors
- Short-term investors (swing traders)
And I’ll make the case for each type of investor why selling options is better than what they’re probably doing now.
Long-term growth investors
Long-term growth investors look for undervalued stocks/companies. They’re looking to buy growth-oriented stocks with large upsides at low prices and hold for a long time–months, years, even decades. They do research and pick out stocks that meet their criteria. Finally they pick prices for those stocks that they’d be happy to buy at and then execute those trades. Market downturns don’t scare long-term investors; they don’t panic-sell. They might even dollar cost average down by buying more shares.
Now let’s consider how long-term investors could take advantage of selling options:
Long-term growth investors selling options:
These investors are the same as long-term growth investors, except for one key difference. When it comes time to execute their trades at their pre-picked prices, they will sell puts instead of buying shares outright. When you sell a put, you get paid (immediately) for your willingness to possibly buy shares of stock at a price that YOU pick. And you only actually buy the shares if the price of the stock drops below the strike price (the price you agreed you’d buy the shares at) at the expiration date (again, you pick this). So two outcomes are possible: 1. you get paid and don’t buy the shares, in which case you can sell additional puts (getting paid each time) until the alternate scenario happens, which is: 2. you’re forced to buy the shares at the strike price. But remember, you were totally happy to buy the shares at that price when you were a regular long-term growth investor. Now you’re getting paid to buy the shares. Which sounds better to you?
Long-term dividend investors
Long-term dividend investors look for value-oriented stocks that pay ample, consistent, and preferably growing dividends. They want to hold these stocks for a long time–months, years, even decades. They do research and pick out stocks that meet their criteria. Finally they pick prices for those stocks that they’d be happy to buy at and then execute those trades. Market downturns don’t scare long-term investors; they don’t panic-sell. They might even dollar cost average down by buying more shares.
Long-term dividend investors selling options:
These investors are the same as long-term dividend investors, except for one key difference. When it comes time to execute their trades at their pre-picked prices, these savvy investors will sell puts instead of buying shares outright. These investors can choose to sell puts that expire every month and get paid anywhere from 0.1% to 5% return on investment. This means that at worst, they are buying dividend-paying stocks and getting paid what are effectively extra dividends every month. What’s not to love?
I should mention one more thing that would appeal to dividend investors: when owning at least 100 shares (which happens when you sell a put and are forced to buy shares), you can then sell a covered call, which is where you get paid for your willingness to possibly sell your shares at a price and time that you pick. Since dividend investors want to hold their shares for a long time, they can sell covered calls at prices that are far above the stock’s current price (making it less likely for them to be forced to sell their shares at that price). But selling that call will generate extra income–effectively another dividend–every month. Think of it like a bonus dividend!
Short-term investors are looking for quick profits. They’re ok missing out on long-term potential profits as long as they’re getting paid a few times per week/month. They look for signals in market/price data, find prices they think are low, buy shares at those prices, then sell when the prices go up. If a stock’s price moves against their preferred direction, they’ll usually stop-out for a small loss.
Short-term investors selling options:
These investors are the same as regular short-term investors, except when it comes time to buy shares, they sell puts at their pre-picked prices. This means they’re getting paid for their willingness to potentially buy shares (which they want to do anyway). If their put expires worthless, then they were effectively paid to do nothing. If the stock moves against them, they may be forced to buy the shares. That’s ok, they got paid to buy the shares and now they can follow their original plan to sell when the stock hits their price target. Or they can sell covered calls. Selling covered calls reduces their cost basis and lowers their break-even price, making it easier for them to turn their short-term trade into a winner.
I hope this post has shed light on the immense potential benefits of selling options for typical types of investors. As always, do your own research before investing and never invest/risk any money you cannot afford to lose.