Selling options for beginners: When to sell options // Selling put options explained, selling options for income, selling options premium, selling options strategy, selling put options, selling put options for income, selling call options, writing put options, writing call options, option writing strategies, writing puts, Options trading basics, options trading strategies, short options, short put options, short call options, short puts, how to sell options, how to sell put options, how to sell call options, Stock market investing tips, stock market for beginners, options trading 101, stock trading basics welcome to looking at the markets with david moadel
David Moadel today I just wanted to make
a basic introductory video about selling
options
how does it work and when should you do
it so this is going to be really it's a
review if you already know about this
and that's ok review doesn't hurt and if
you're new to this this is a great
starting point
alright so options and I have a whole
other video you can look for that and
i'll put a link in the description i've
been another video about what options
are what our options
it's called and you might want to check
that out before you listen to this video
before you watch it
alright so selling options well when you
want to sell something and you want to
sell options in particular you don't
want to sell the good stuff
okay you're kind of like there's an old
TV show called Sanford and Son and Fred
Sanford played by red fox was a comedian
you played he played a junk dealer he
sold junk and you want to you want to be
like Fred Sanford alright you want to
sell junk you don't want to sell quality
stuff you want to sell options that are
going to deteriorate or diminish in
value
the quicker the better and so has that
work how do you sell junk how do you
become a junk salesman or junk dealer
well ok imagine this is kind of how it
works and just go with me here
imagine if you met a guy on the street
or wherever and he said okay I'll tell
you what I'll make a bet with you I i
have a ten sided dice the dice that has
10 sides on it and it has the numbers
one through ten 123456789 10 ok and I'm
going to guess a number from one to ten
and then I'm going to roll the dice and
if I pick the right number then you have
to pay me you have to pay me ninety
dollars if i'm wrong i will pay you ten
dollars
ok so if I pick the wrong number i'll
pay you ten dollars
if I pick the right number then you have
to pay me $90 is that a fair bet and and
let's say you're going to play this game
with them over and over and over many
times hundreds of times or thousands of
times is that a fair bet
yes it is because think about it let's
say you all right
he rolls the dice and or what let's say
you let's say you play this game 10
times
ok he rolls the dice 10 * guess is a
number ok if you play ten times that you
play this little dice game 10 times with
a guy you can expect that out of 10
times he's gonna be wrong
nine times out of ten and so he's gonna
pay you ten dollars every time is wrong
and so if you play the game 10 times
with this guy you're going to get 90
bucks you're going to get ninety dollars
from him but then on the tenth time
he'll probably get it right and then
you'll have to give him those ninety
dollars back because remember you pay
him ninety dollars if he guesses the
number correctly on the dice
so if you play it ten times you'll
probably come out even
you know you'll get it right nine times
on average and you'll get you ninety
dollars 99 times ten dollars and then a
ten-time he'll probably get it right and
you'll pay him back the ninety dollars
and you'll you'll break even so it's a
fair bet
and that's how it works you know the the
less likely you are to win the more
money you should win when you're right
and the more likely you are to win the
less money you should win when you're
right and you should have to risk more
if you have a much greater likelihood of
winning or of being right on your bet
and so that's a fair bit but is there
any reason to make that bet not really
there's no statistical edge there's no
statistical or mathematical advantage in
that game for you so why play that game
you'll probably come out even over time
if you play that game with the guy you
know hundreds or thousands of times
you'll come out about even over you know
over a large number of of times you play
that game but it is just a kind of a
waste of time and effort so why do it
only play a game where you have a
statistical edge or advantage
all right now what if imagine that guy
ok imagine if he's bad at math so
imagine if instead he comes up to you
with a 10 sided dice and he says okay
I'll tell you what we're going to play
this game many times hundreds and
hundreds of times or even thousands of
times and i'll roll the dice and I'll
guess a number and if I get it right
i'll pay you twelve dollars and if I get
it wrong you pay me $90 ok remember this
is the same guy except he's bad at math
alright so instead of paying attend AA
leurs this time you the payout for you
will be twelve dollars for the same that
would you play the game with that guy i
would i would play i would play that
game with him over and over and over
are you kidding me i would play that
game with him every day I would wake up
at five o'clock in the morning and go
find that guy and say okay you ready to
play the dice game here we go
and I play with them that same game with
him over and over and over hundreds of
times every day five days a week or
seven days a week however much time i
have until he was broke and eventually
he would be broke because I would have a
statistical advantage again overtime now
don't get me wrong don't get me wrong
there you go flukes happen
that's why you have to play the game
many times to average it out correctly
because it's possible that i would go
and find the guy i would get up at you
know five o'clock in the morning and go
find the guy and I I'd say okay let's
play the dice game here we go
and maybe he would roll the dice in the
very first time he would get it right
and I'd have to give him 90 bucks ninety
dollars maybe the first two or even
three times just by pure luck by pure
fluke he would get it right and now i'm
giving him $MONEY ninety dollars or
hundred and eighty it's twice or 270 if
it's three times in a row
all right that wouldn't be fine and that
can
happen that can happen even if you have
a statistical edge or mathematical
advantage it's possible that the first
few times you can lose the bet
alright but then over time if you just
keep playing it and playing and playing
hundreds of times or a thousand times or
thousands whatever
eventually the averages will work
themselves out and you'll still have
that advantage and you'll come out ahead
over time and you have to understand
that that's how it works sometimes or
well that's how it works all the time
it's just that flukes happen and you
have to be ready for that when you play
any game even if you have the advantage
mathematically now if you're an option
seller you sell puts and calls to people
when volatility is low and you can look
up on on your brokers platform hopefully
if it's a good platform if they have a
good trading platform you can look up
the implied volatility or IV of of any
stock or ETF or whatever it is you're
selling options on whatever the
underlying equity or an underlying asset
is you should look up the IV rank the
implied volatility and and look it up
over time see what it you know what what
were what was the implied volatility you
know what were what do those numbers
look like in the past so you have a
point of reference study up on it now
look at the implied volatility if it's
low compared to the way it usually is
then it's kind of like you're playing
the dice game with the guy who is only
going to pay out ten dollars when you
when you win when he guesses it wrong
alright so if the IV rank of the implied
volatility of the underlying asset is
low
there's no point selling options because
there's no statistical and your
advantage however when volatility when
implied volatility spikes when it rises
sharply when it goes up a lot then
that's kind of like when you're selling
options on that underlying equity that's
kind of like playing the dice game with
the guy who's bad man
and who pays out twelve dollars instead
of 10 when you win so you have a
statistical advantage
alright and so if the late let's say if
the Delta okay is it let's say that your
likelihood of let's say your likelihood
of selling an option to somebody if your
likelihood uh-oh of the option expiring
of the put option or call option
whatever it is if the likelihood of it
expiring out-of-the-money is ninety
percent or conversely if the likelihood
of the option expiring in the money is
ten percent that's kind of like playing
the dice game
yeah that that's because it if you know
from the Delta and check the Delta ok
you can learn from the Delta what the
statistical probability of that option
is for expiring in the money
alright check that Delta and if your
likelihood of the option expiring
worthless or expiring out-of-the-money
is out-of-the-money is ninety percent
then it's kind of like playing the dice
game you're going to get it right
you're going to win the bet nine out of
ten times now you only want to sell
these options when the IV or implied
volatility is high because then people
are going to pay more than they should
for the options especially this is
especially true for put options because
people buy put options for protection
for stock that they've already bought or
ETFs whatever they already own and then
the when volatility spikes people are
scared they want to buy insurance
they're afraid that the markets going to
crash or they're afraid that the stock
that they already own is gonna go down
and down and down to you know you just
keep dropping which usually doesn't
happen usually the market does not crash
once in awhile it does but usually it
goes down and then comes back up pretty
soon or relative
soon quicker than people think the
market tends to overreact people panic
more than they should and they pay more
than they should
four options for puts and calls
especially puts calls to but this is I i
found even more true for puts because
they're buying that for crash protection
and so now when the volatility is really
high is unusually high that's kind of
like playing the dice game with a guy
who's bad at math
who's willing to give you ten I'm sorry
twelve dollars every time you win
instead of 10
ok so people who buy options at too high
of a price because volatility is is
unusually high
i'm not gonna insult those people and
say they're bad at math but they don't
have the mathematical edge they don't
have the statistical edge you do if you
sell options to them at the right time
and what's the right time when
volatility is especially high which is
going to cause in most cases going to
cause options to be overpriced to those
options prices are going to be inflated
alright so that this is just a beginner
primer on you know as what options
selling is all about I wanted to give
you an analogy it's like placing a bet
and if you do it at the right time and
it's like placing a bet against a guy
who doesn't have maybe a full
understanding of how mathematical
probability works or maybe they do have
the intellectual understanding but
they're just emotionally overreacting
and they're willing to pay too much at
that moment for a put option or call
option and so you sell it to them and
maybe the first first time you sell an
option to somebody
yeah maybe it's a fluke maybe even
though the Delta tells you that the
likelihood of that option expiring in
the money is only ten percent well that
means that one out of ten times it is
probably going to expire in the money
and you may have to take a loss
it may just be a fluke the first time
you sell an option or the first couple
times even maybe the first three times
whatever that you know there's always
risk in the stocks
in the world of stocks and options
there's always risk but if you play this
game enough times and you play correctly
enough times and make sure you have that
statistical mathemagic mathematical
advantage or edge every time and and i'm
assuming that you're only you know
working with options representing
mega-cap stocks well-known stocks or
ETFs yeah you're not dealing with you
know small companies that might go
bankrupt her out of business
ok we're talking about well-established
you know mega mega cab super famous
companies and ETFs alright with and
these are highly liquid stocks and etfs
we're talking about here with plenty of
buyers and plenty of sellers for those
options
alright so if you assume all that and
you play the game correctly and be
patient wait until volatilities
volatility spikes before you try selling
these options and really study study the
underlying equity study it know about
learn about it
learn about IV rank and what is the
typical IV rank and is it especially
high at this moment that's when you
might consider selling options and all I
i recommend you know it don't sell naked
or uncut naked or uncovered options
unless you really know what you're doing
and you can handle a lot of risk
otherwise just go with you know options
spreads where you sell some options but
then you also buy some options in order
to hedge or limit your risk or your
limit your potential loss there and you
know that these are separate subjects
and I don't want to I don't want to go
into that in this video I'll go into
that in other videos if you want but
anyway hopefully this was a good you
know either review or a good starting
point for you to consider getting into
options
consider yourself a junk dealer you're
selling options that you know have a lot
of decay or deterioration to them they
you know they lose their value quickly
and they're not likely to expire in the
money because here you're going you're
looking at the delta and you're
examining that before you sell the
options and you're selling to people who
either don't understand
how how the probabilities work or maybe
they're too emotional to think about
that kind of thing at the moment
alright so my name is David Modell i
hope this is I hope this was helpful to
you if this video has been helpful or
helped clarify some things to your just
help you think about selling options in
a different way
please give this give this a thumbs up
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those alright and if you want to contact
me
my email address is in the description
in the video it's David Modell @
gmail.com
you can contact me anytime if you need
more help with this or if you just want
to put together a trading plan or if you
just want to if you have questions about
stocks options whatever we'll talk about
it
thank you so much i hope this was
helpful and i'll talk to you soon