Options Selling: Be the House, Not the Chump
Do you want to trade like Warren Buffett? Then you should be selling options.
Options selling is the business of collecting premiums from traders who want to be protected from adverse circumstances. As a seller of put options, you essentially promise to buy an asset if it experiences a significant price drop. In return for that promise, you get paid a premium-the same kind you pay an insurance company to protect you against a catastrophe.
Of course, you occasionally pay out a claim, but if you have any experience with insurance, you know that those scenarios are usually few and far between and can be manageable.
So, why should you sell puts and calls? Because there's huge demand for them.
Covid-19, geopolitical risks, trade war, oil collapse, volatility. All these factors make investors nervous about the future of the stock market. Even in bull markets, investors want to feel like they're protected.
When you sell options, you can potentially reap the following benefits:
- Get paid your potential profit up front in the form of a premium.
- If the option expires out of the money as it often does, nobody will exercise the contract and you get to keep your entire premium.
- As time value decreases, the drop in an option's value reduces your risk as the options seller.
- You can close your trade at any time.[i]
Billionaire investor Warren Buffett is known for being a "value investor," but even he has sold several billion dollars' worth of put options.[ii] Under Berkshire Hathaway, Buffett has designed put contracts maturing over 15 to 20 years.
By selling options, you essentially become the "house" or "insurance company," not the chump that is constantly chasing the market.
To trade like Buffett, you need to be the kind of trader who avoids herd mentality. In other words, you must be ready and willing to own stocks when their prices fall.
Options selling offers a unique risk-reward profile for traders who want to earn steady returns over time. While the amount you can earn is significantly less than options buying, the strategy is inherently less risky since time value works for you rather than against you.
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