No matter how you define risk in specific terms, the concept of risk always involves losses. High risk is associated with a greater-than-average possibility of loss.
By that definition, selling options could be one of the lowest risk strategies an investor can use. I think of options as an investment where there will be an equal number of winning and losing positions. This is simply a result of the way options are designed. Whenever an option is bought, someone else must be selling, and one side of the trade will be a winner while the other party will face a loss.
Options give the buyer the right to buy or sell shares of a stock or an ETF at a predetermined price known as the exercise price before a specific date. Because they have an expiration date, on that date the option buyer will have either a gain or a loss and the trade is over either way. There are only two possible outcomes, and if the buyer wins, then the options seller must have a loss.
Conversely, when the options buyer loses, the seller wins. They actually have a very high probability of losing. Remember that there is a winner for every losing options trade.
We can even tilt the odds in our favor slightly more by looking at whether call or put selling would be more profitable. A call option gives the buyer the right to buy the underlying stock and a put option gives the buyer the right to sell the underlying stock. Call buyers profit when prices go up, while put buyers profit when prices decline. This data shows that selling puts has a high probability of success. When you sell a put, you will generally sell it at an exercise price that is below the current market price.
Unless the price of the underlying stock or ETF falls below the exercise price, the put will expire worthless. To minimize the risks of put selling, you should only sell put options on stocks or ETFs that you would like to own. I believe one reason the success rate for put sellers is so high is because the market is dominated by professionals. They know the fair value of the puts they are willing to sell and take trades only when the time is right. Individual investors can easily profit from selling puts just like the professionals, but this strategy requires doing some homework.
Trading options could be a way to increase your income by hundreds or even thousands of dollars every month, but you need to study the market before making trades. Consider selling put options if you are looking for an income strategy that offers low risk. Each week since February , I have provided my Income Trader subscribers with a low-risk put or call selling opportunity.
My track record now sits at an astonishing for You can see how I've done it here. Backtests from the past 10 years found that stocks with this ranking were actually the best performers.
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