Options Trading Strategies that Rely on Selling Options

Options trading strategies that rely on selling options are called short options. In the short option you will receive a premium for the option because you are assuming an obligation to take the opposing position of the buyer of the option in terms of the underlying asset price.

Enjoying Some Advantages

Selling options has some advantages that make it one of the popular options trading strategies. One of the most important is the fact that as the option ages, the option appreciates in value because the seller has more premium. As the underlying asset moves out of the money, the extrinsic value or time value grows. In other words, time decay works in the option seller’s favor.

The second main advantage of the options trading strategies that rely on selling options is concerned with volatility. The higher the vega or implied volatility, the more likely the premium price will be inflated. This equates to more money for the option seller.

A third advantage of selling options is that the majority of purchased options are allowed to expire.

Recognizing the Disadvantages

There are some disadvantages to selling options as one of your options trading strategies.  One of the most important is the fact a short option has unlimited risk because an asset price can theoretically rise to any price. In addition, the options seller only earns premium.

Because a short call option has unlimited risk, many traders implement spread strategies to put a cap on the risk. Selling puts is less risky because a stock price can only decline to zero. The risk of loss can be managed by hedging with spread options trading strategies.

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