Earnings season brings about a variety of opportunities for options traders. This is because options traders can take advantage of the unique facets of options, including implied volatility, premium, and theta decay.
Options pricing changes based on these factors, along with the underlying stock’s price. What is excellent about earnings season is that there are replicable themes in play that can be traded quarter over quarter.
Pros vs. Cons of Selling Premium in the Options Market
Pros of Selling Premium:
- Income Generation: Selling options premium can generate a consistent income stream from the premiums collected.
- Time Decay: As an options seller, you benefit from the time decay (theta) of the options contracts, as their value erodes over time.
- Lower Market Risk: Compared to buying options, selling premium can carry lower market risk since you receive premium (credit in your account) versus spending money to buy premium (as you do with long options)
Cons of Selling Premium:
- Unlimited Risk: Selling naked (uncovered) options, without a corresponding position to hedge the risk, can expose you to unlimited potential losses if the market moves significantly against your position.
- Margin Requirements: Depending on your broker and the specific options strategy, selling options may require you to maintain a certain level of margin, tying up capital.
- Assignment Risk: There’s always the possibility of being assigned (required to fulfill the options contract) when selling options, which can lead to unwanted positions.
It’s important to note that options trading, including selling premium, can be complex and carries a higher level of risk than simple stock trading. If you’re considering this strategy, it’s crucial to thoroughly understand options, conduct proper risk management, and possibly consult with a financial advisor or professional before implementing it.
Defined Risk Strategies
When I sell premium in the options market, I make sure to never have unlimited risk. This is why I don’t sell naked options, ever! When I sell options, I sell them as a spread, which always caps and defines my risk. This way, when I’m wrong, I don’t end up with unlimited risk or an assignment that can’t be covered by another leg in a spread.
The defined risk premium selling strategies I use include call credit spreads, put credit spreads, and iron condors.
I use call credit spreads when I’m bearish, put credit spreads when I’m bullish, and iron condors when I simply want a neutral, volatility crush position to take advantage of the unique facets of earnings surrounding earnings season.
Discussion with Charles
Yesterday, I joined Charles Payne to discuss the strategies that I use surrounding earnings.
Click on the image to learn more below!
What are your favorite earnings season strategies? Let me know on Twitter @traderdanielle.