There are ups and downs in every business activity. Many beginners start to question the concept as soon as first difficulties come, but some difficulties do not mean a stop to the whole business. It is important to stay determined even if things do not work out and give it a chance for success. If you do not give up and regularly acquire knowledge and practical skills, you will ultimately succeed.
Exception that proves the rule
It is usually a good idea to bet that the stock market will go higher as of mid-November until the end of December. This seems to be the case also this year. Equally, in this time period, it makes sense to bet on those stocks that have had a lot of success. Despite that, one might sometimes chose not-the-best candidates for option selling.
There is nothing certain in the stock market. Take as an example Nvidia, this year. The company has done very well, but there were some negative news, which resulted in approximately 9% decrease of the shares price in one day. This happened at the end of November. At that time, I sold put options on Nvidia assuming that the price will not decline below the price of $197,5. The slump in price resulted that the options multiplied in value, so according to my risk management rules, I immediately bought the options back and closed the trade. The whole damage was something below $2.000 which is not nice, but it is far from paralyzing my account. I am presenting such an example to demonstrate that this is also a part of option selling.
Option selling is like an insurance business
Option selling is like running an insurance company. If you insure 10 houses, most of the time, nothing will happen to 8 or 9 of them. So, you keep the insurance premium and the insurance policy expires. This is a proven concept that works.
There might be some problems with one or two houses. The whole point is about how you choose your houses which you are going to insure. Even if floods come, it is a difference whether you insured a house directly at the river or more uphill. The water might also come uphill, but it will not destroy the whole house, but just flood the cellar.
The same is true with option selling. If one company has increased its price by 100% in a short period of time, 20% correction might be normal. Therefore, if you are a conservative investor, it might make sense to choose steady growing, established companies.
Depending on risk aversion, choose the most suitable approach
There are many different ways how to sell put options on stocks. I would like to present two of them:
- The first one is by selling “naked” put options when one speculates that the price of shares will not decrease below a certain level. This way of option selling requires very strict risk management rules and discipline in order to achieve success.
- The second way is more suitable for investors. Those, who want to buy some shares, do not have to buy it at the current price or by a limit order. There is a better way. An investor can sell put options on the stock. In this case, these will be “cash secured” put options because the investor will be ready to take the shares when their price goes below the strike price of the options. This is beneficial for the investor as he or she will either buy the shares at the strike price of the put options which he or she chose. In the other scenario, when the price of the shares will stay above the strike price of the options, the investor will not get them, but he or she can keep the option premium. This is a significant advantage when compared to a limit order. Hence, there are ways how option selling can be suitable even for very conservative investors.
Do not give up and achieve success
Whether you are an option seller, trader, investor or active in a complete different field. If you really like what you do, do not give up because things did not work that way as you wanted. Every active person has experienced some difficult times. That belongs to the game. It is always better to try something than do nothing.
I wish you a lot of success with your business activity.
Merry Christmas and Happy New Year. I have to go to decorate the Christmas tree…