It doesn’t matter how much a stock or security is worth. What matters is the price at which someone is willing to sell it or the price at which someone is willing to buy it. This is especially true in options trading, where prices don’t matter as much as they do in other types of investing. In this video, we will discuss why prices don’t matter when it comes to options trading and how you can use this information to your advantage!
We will discuss:
- Why stock prices don’t matter in the short term
- Why stock prices do matter in the long term
- How you can win selling 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!
Why stock prices don’t matter in the short term
The first reason why stock prices don’t matter in the short term is because you are not buying the stock, you are selling an option. By selling options, you are taking on the role of the insurance company. You are collecting premiums from those who are buying options from you and in return, you are accepting the risk that the stock price might move against you.
When you sell an option, your goal is to have the stock stay below the CALL strike price or above the PUT strike price, depending on which type of option you sold. It doesn’t matter if the stock price goes up or down, as long as it stays above or below your strike price.
The stock market is extremely efficient. Everything is priced in immediately in real-time and no one has an edge about where a stock price will go in the short term. For this reason, we like to sell premiums on both sides of the market for the short term. We can only lose on one side and sometimes we win on both sides!
We typically sell options 30-45 DTE days to expiration since this is a mathematical sweet sport where we optimize the amount of premium we can collect versus the amount of risk that we take.
So 30-45 days is what we are talking about here when we say short-term.
Let’s take a quick look at selling a strangle in Paypal. We can sell a Strangle with by selling the 65 PUT and 97.5 CALL option with 44 DTE days to Expiration and collect $335. This is 1/3 the width of the $10 strike spreads which is ideal. It has a 73% probability of profit.
We can take a look at the chart and see that over the last 6 months Paypal has stayed within this range. So in the short term, the price can move a lot and we still stay within our short strikes and can keep the premium collected.
Why stock prices do matter in the long term
Now stock prices do matter in the long term. They matter because we want to have a long-term outlook on whether a particular stock, industry or sector is undervalued or overvalued. Short term it is tough to say. However, long term based on history and many other factors we may feel that we have a preferred direction that we think it will head in the next 1-2 years.
Now we will sometimes be right and sometimes be wrong. If we sell premium and we are wrong we still make money.
If we sell premium and are right, then we make lots and lots of money! This is the beauty of selling options premium.
I like to pick undervalued stocks in sectors that I believe will do well over the next 1-2 years. Sectors like Fintech, DNA Sequencing, EV’s and Banks. Then I go long and sell PUTS in those stocks and ride them up month after month. Stocks like SOFI, Illumina, Tesla and Bank of America.
At the same time to bet against the market will sell Call Verticals in QQQ or SPY to balance out my Delta and stay Delta Neutral.
If I think the market is overvalued and headed lower, I will have more short positions and sell Call Verticals. If I think the market is undervalued I will sell more PUTS and PUT Verticals. However, I will always have some neutral positions as well.
How you can win selling options premium
Stick to a set of rules when selling options premium. We should know our management strategy at all times even before we place a trade. We take the emotion out of the trading. It is an enemy to traders and can result in poor decisions.
We place trades 30-45 DTE with high IVR to collect good option premiums
We place trades on both sides of the market. Using different strategies including Put and Call Vertical, Strangles and Iron Condors.
We look to close winners at 25-50% (depending on how many DTE).
Managing losers at 15-21 DTE and roll to the next monthly options cycle. We can often collect additional premiums and we give our trades time to come back and work in our favor.
Alright guys, please hit the like and subscribe buttons below as well as comment. Also, 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!