Why Selling Options Isnít As Risky As You Think

When stocks are yielding 3 percent or less on dividends, selling options can help you generate more income. One thing that happens when you sell an option is you collect an up-front premium for selling the right to sell a stock. That is one of the major benefits of writing options. Plus, you don't have to be right to make money. With option selling, it is not about hitting home runs--you just need to hit singles consistently. This is the power of applied odds over time. While there is always a risk, consistency is the key.

Investing is full of uncertainty

People will always worry about the stock market. With options, time works in your favor. Regardless of what is happening with the underlying market, you will always get a premium for your option. Then, when you sell an out of the money option, you get time value.

When time passes, the option will lose its value--also known as time decay. Acceleration starts to happen as the expiration date gets closer. In fact, an option is called a "wasting asset." If the contract price does not move to the strike price by the expiration, then you get to keep the premium. This is just one of many reasons why selling options is so enticing.

Make a good income

You can use options to generate income from your current stock portfolio. If you are right about the direction of the stock, then you want the options you sell to expire worthless. You are basically collecting rent on your positions, without having to fund it--outside of your original investment. So, you are creating an income from your current holdings.

There is always an expiration date

One of the most difficult aspects of trading is figuring out when to take a profit. Do you wait? Do you cash in now? How can you tell? Should you make a bigger move or just let it ride? With options, you don't have that much guess work because there is always an expiration date.

If the option is still out of the money at expiration, then you keep the premium and your position automatically closes out. Yet, you still have the right to close out your short option position any time before expiration. It's really up to you. Nonetheless, you don't have to put much effort into letting the market do the work for you.

You don't have to consult with a crystal ball

Trying to predict the direction of the market is an exercise in futility. There are so many factors that contribute to how the market will react on a daily basis. Regardless of what anyone says, no one can really tell what the market is going to do--especially in the short term. You can certainly use statistical guesses to make an accurate projection, but there is still no guarantee.

With out of the money options, you don't worry about where the prices will go. You are only determining where you think the prices won't go. As long as the market is above your strike price during expiration, you will keep your entire profit. When selling options, you don't need the market to move in any specific direction. Even if the market does not move, you can still make a profit.


Carmelo is a marketing writer and blogger helping small and medium size businesses craft winning content strategies. She's always scouting the web for new social media strategies and is slightly addicted to apps. When not tapping the keyboard, you are likely to find her in the park playing with her uncontrollably friendly Irish setter or trying out new vegan recipes.

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