Welcome back to Pandrea finance, my name is Alex Pandrea and today I am going to show you my strategy for selling options for passive income - how I enter trades, which strike prices I choose, and more importantly how I close out my trades to continuously collect income on a weekly or monthly basis. Now at the end of the video I am going to share with you the exact step-by-step game plan that I follow whenever I sell options.
When you buy options, you PAY a premium for the option. When you sell options you COLLECT a premium. The money goes from the buyer of the option to the seller of the option. Since both the buyer and seller are betting on the same option only 1 can win the trade - as in - the option can either expire IN the money or OUT of the money. The buyer is hoping the option expires IN the money. The seller is betting that the option will expire OUT of the money. This is in essence the ultimate goal of buying and selling options - and you make profit as that goal becomes a reality in the markets. Here is the interesting part (all info in video)
Moving on to the second part of this strategy - the different ways that you can make money selling options. Selling options can be broken up into 2 categories - selling puts and selling calls. Here is a chart explaining each.
SELLING PUTS - Selling puts gives the seller the obligation to purchase stock at a given strike price if that option expires in-the-money and the option is exercised. - If we want to sell options for income we do NOT want our stock price to drop below our strike price. If that happens we may be forced to buy 100 shares the company for every 1 option contract we sold. - We MUST have collateral in the form of CASH to cover our position in case we are forced to buy the stock. - If the stock price does NOT drop below our strike price then we get to collect the entire premium.
SELLING CALLS - Selling calls gives the seller the obligation to sell stock at a given strike price if that option expires in-the-money and the option is exercised - If we want to sell calls for income we do NOT want our stock price to exceed our strike price. If that happens we may be forced to sell 100 shares of the company for every 1 option contract we sold. - To cover our position we MUST have collateral in the form of shares. 100 shares for each option contract. - If the stock price does NOT exceed the strike price then we get to keep the entire premium.
So to summarize the process of selling calls and puts - the first thing you do is to make sure you have the collateral necessary to start selling options. Ok so you have the collateral - then you pick an option you want to sell and you sell it. Once you sell the option you collect the premium and that money is then put into your account right away. That money is now yours to do what you want with but keep in mind - we’ll need to CLOSE our position by buying back the contract at some point. In the best case scenario the option will expire worthless and you won’t need to buy it back BUT in a lot of cases you might have the option be worth pennies but not quite zero and you don’t want to wait until expiration so you’ll decide to buy back the option at a lower price than what you sold it for and keep the difference in profit.
Its important to understand that this is a percentage game and the money that you’ll make is going to be in percentage terms relative to how much collateral you have - so we always look for a return on collateral to determine if a trade is good or not. Typically I look to make between 2 and 3% per month on the money I use for selling puts and calls - and through my experience it usually averages out to 2% per month return overall which is a great return.
Now here comes the most important part of selling options - closing the position and buying back the option. Now as you know our ideal scenario is to have the option expire worthless at expiration - this way you collect 100% of the premium - but is that really the ideal scencario? Well let’s look at a scenario - you sell an option expiring in 1 month and you collect the full premium. You want to hold on to that premium and not have to give it back - but next week lets say the option loses 50% of its value. Well in that case what I would do is to buy back that option and only keep 50% of the value of the option and then open up a new position rather than having to wait another 3 weeks for the other 50% of that premium. (Full strategy in video)
