Advantages and Disadvantages to selling options

Selling Options has its advantages and disadvantages; if you are interested in getting into option trading this is something you might want to consider.

When you sell options you are not trying to predict which way the stock will move, rather you are trying to decide which way the stock is likely not to move to.  So if you find a stock that is trading at $70 and expect it to go up you could always sell the $65 put for $2.4 walk away with the premium and profit as long as the stock stays above $65.

So it is pretty obvious to see the benefits of option selling.  With this strategy you don’t need the stock to go in your favor to be profitable.  Instead you only need the stock to not turn against you too much.

This means you will more likely be right more often which can help in you in the following ways.

1.       Give you Higher confidence

2.       More of a monthly cash flow

3.       Make it easier to find winning trades

Of course selling options can give you some great risks.  If the above example fell to say $20 you would have to buy the stock at $65 and sell it at $20, which isn’t much fun.  But there are thing you can do to limit your risk.

The major disadvantage of selling options is not in its risk, but in missing opportunity.  The most you could possibly make by selling an option is the price of that option.

So even if the stock goes up to $80, $90, $100 our max profit would be the same.  That means it is possible to miss huge gains.

If you are selling an option that is just something you are going to have to accept.  By selling options you are accepting the fact that you will not make a 100%,200% or more then you might be able to if you bought an option, but you will be right more often.  And small gains can add up.

For more on option selling visit http://www.stocks-simplified.com/option_selling.html