When you are trading options, you have to decide whether to sell or buy options. This is an important decision, because it can impact your profitability as a trader. In this video, we will explore the pros and cons of selling and buying options premium, so that you can make an informed decision about which strategy is right for you.
We will discuss:
- What is Options Premium?
- Why do people sell Options Premium?
- Why do people buy Options Premium?
- Which is the better strategy: selling or buying Options Premium?
Real quick guys, please hit the like and subscribe buttons below as well as comment and let me know your thoughts on this video.
Also, be sure and grab the FREE Simplified Options Strategies Trading Guide. I’ll put a link down below. It covers the different options strategies setups, how and when to put them on, max profits, and trade management. It’s a great guide to have by your side when trading options.
So let’s get started!
Let’s start with a definition of Options Premium. Options Premium is the price of an options contract. It is determined by the underlying asset’s price
What is Options Premium?
Options premium is the price of an options contract. It is determined by the underlying asset’s price, strike price, time to expiration, and volatility. When you sell options premium, you are selling the right to buy or sell the underlying asset at a certain price.
Options buyers pay options premium because it gives them the right to buy or sell the underlying asset at a certain price. Options sellers collect options premium because they are selling that right to someone else.
Let’s take a look at selling a PUT option in Paypal. With the stock trading at $80 we sell the $70 PUT option and collect $271. If the stock drops down to below $70 before the expiration in 44 days then we can be assigned the stock at $70. We keep the $271 in premium if it stays above the the $70. This would take a fairly large move. If it did happen, we own the stock at a huge discount to where it is trading today at $80.
Now on the other hand, if we buy that same PUT option, we pay $276. Buy paying that premium we then can own the stock at the $70 strike price if the stock drops below that price. This can serve as protection or insurance against a big down move. However, notice that it has a very low probability of profit of 24%.
Why do people sell Options Premium?
People sell Options Premium for a couple of reasons. The most common reason is to take advantage of time decay. Time decay is the amount by which an option’s value decreases over time. When you sell Options Premium, you are selling an option that is likely to expire worthless, which means you get to keep the Options Premium as profit.
Another reason people sell Options Premium is for income. Selling Options Premium gives you the potential to earn regular income from your trading account. This can be a great way to supplement your income or to fund your trading account so that you can trade larger positions and grow your account as a side business.
Why do people buy Options Premium?
People buy Options Premium for a couple of reasons. The most common reason is to take advantage of leverage. When you buy Options Premium, you are essentially paying for the right to control a larger amount of the underlying asset than if you were to buy the asset outright. This allows you to control a larger position with less capital.
LEAPS options are longer term options that can be bought as a strategy to use less capital to control more stock. It is a good way to go long on a stock that has been beaten down. I’ll link to a video down below that discusses how LEAPS work.
Another reason people buy Options Premium is for speculation. When you buy Options Premium, you are betting that the underlying asset’s price will move in your favor. If the asset’s price does move in your favor, you will make a profit.
Lastly, people buy options as insurance. They may buy a put to protect from downside risk in the market.
Which is the better strategy: selling or buying Options Premium?
Guys, this one is easy. Would you rather be a gambler or own the Casino? When you sell Options Premium, you are essentially owning the Casino. You are collecting Options Premium from people who are speculating on the direction of the market. Over time, the majority of people will lose money when they speculate, which means you will make money.
When you buy Options Premium, you are taking on the role of the gambler. You are speculating on the direction of the market and hoping to make a profit. However, the odds are against you. The majority of people who buy Options Premium will lose money.
So, which is the better strategy? Selling or buying Options Premium? The answer is selling Options Premium. It is a higher probability way to make money in the markets.
Alright guys, please hit the like and subscribe buttons below as well as comment and let me know if you have any questions about trading options.
Also, be sure and grab the FREE Simplified Options Strategies Trading Guide. I’ll put a link down below. It covers the different options strategies setups, how and when to put them on, max profits, and trade management. It’s a great guide to have by your side when trading options.
Thanks for watching and see you in the next one!