I started trading options in the late 90′s. After selling my 1st choice and collecting an immediate credit I and became an choice seller for life. I became a student of alternative selling techniques and began selling covered calls on stocks I brought and owned. I was doing OK collecting premiums month after month until a couple of of my stocks tanked and my losses over a 2 month period wiped out 6 months of profits. My mistake was picking not so good stocks for this covered call option selling technique. So I became a student once more and discovered an alternative trading technique that is truly incredible.
Selling Option Credit Spreads on the broad based stock indexes was my new strategy. My goal was to collect premiums every month utilizing OTM (Out of The Money) possibilities spreads, specifically Bull Put Spread and Bear Call Spreads on the SPX index. I was selecting spreads that had been really far OTM so that I had a greater cushion which reduced my risk.
Selling spreads is much more akin to waiting for the massive move to occur and it rarely does. Time decay is very relevant because despite being a spread, the spread does have a substantial rate of decay in the last week or two. The beauty of this technique is that you do not necessarily want to sit on top of it all the time. If your strikes are 40-60 points OTM and the SPX is up 1.20 nowadays, you gain nothing by checking the quotes every minute. You can just check in the morning and at the close at your leisure as lengthy as you are sufficiently OTM. When the marketplace starts moving closer to your short strike, some due diligence is needed. With credit spreads you want the position to expire worthless or purchase back for way much less that you sold it for.
The goal is to collect premium month to month. Using OTM spreads is a way to do this without predicting the market for the month. In any given month, the market can still move sideways, lower or higher and your positions will still be profitable. You are trading without concern over market direction for a major crash lower.
Today I employ a quite safe and conservative Iron Condor credit spread trading strategy. My technique with iron condor trading is to leg into the trade by selling the Bull Put Spread initial for .20 – .25 cents. This is only a 2% – 2.5% return but the trade is very safe and the short strike is generally 60 points or much more away from the current index price. I will then complete the condor by selling the Bull Call Spread later on for an additional .20-.25 cents, but only if the trade is safe. Safety is the key to my strategy with a goal of earning on average a 3% return each month.