- Using Stock Options to Generate Income
- Buying Put Options
- Put option
- Selling Options For Income: 5 Surprises That Can Help You Make Money
Using Stock Options to Generate Income
At tastytrade, we prefer to sell premium to give ourselves the best opportunity for success. From a price direction perspective, when selling premium we can win in three scenarios: if the stock price stays the same, moves against us slightly or moves in our favor. When buying premium however, we can only win in one scenario, and that is if the stock price moves in our favor fast enough.
Bringing IV into the equation opens up another dimension in which we can profit. In low IV environments we may look to buy premium and hope for an IV expansion, and in high IV environments we look to sell premium in anticipation of a contraction in IV. One of the most important aspects of selling premium is the positive theta value that results. Theta is the time decay of option premium. First and foremost, it happens when you buy an option, and then sell the opposite type of option. This would occur by buying a call and selling a put OR buying a put and selling a call.
This generally works best when prices are near the lows because it theoretically limits the downside risk associated with the short put.
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On the flip side, selling a call to pay for a put allows you to cheapen up your downside protection in exchange for setting a ceiling on your physical production. This strategy generally works best when prices are near the highs because it provides you with a better strike price on the put, and theoretically limits your risk associated with the short call option. My goal with this article was to clear up how selling options on futures works.
Buying Put Options
Are you a sell-side producer looking for more information on fixed risk hedging techniques? This guide covers basic and complex hedging strategies that can help you avoid exposure to unlimited risk on your hedges. This material has been prepared by a Daniels Trading broker who provides research market commentary and trade recommendations as part of his or her solicitation for accounts and solicitation for trades; however, Daniels Trading does not maintain a research department as defined in CFTC Rule 1.
Daniels Trading, its principals, brokers and employees may trade in derivatives for their own accounts or for the accounts of others.
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Or you have the option to have either one of those options. And let's say that the stock does something like that. Well, it's going to be in the money. So you would make money. But if you have the option with a closer expiration, with the April, expiration, you have to exercise the option right now.
You would have to exercise it right now and close out the option. If you had the longer dated option, you could do it. You could do the exact same thing that this owner of an April, option has. Or you can hold the option and maybe see if the stock continues to go up.
Or you could imagine a downside scenario. Maybe the stock does something like this, where it goes out of the money.
Selling Options For Income: 5 Surprises That Can Help You Make Money
Someone who holds the closer dated option, the one that expires first, they'll be completely out of the money. The option would be worthless on this date. But if you have the longer expiration, if your option does not expire until December of , then you could hold it.
And maybe, maybe the stock will do something nice.