Most individuals I've come across shy away from selling calls/puts because it's a slow way of making money. People don't seem to want to wait a whole month to collect a few percentage points. I must say I agree...that strategy does sound boring.
When I deal with options, more often than not I'll be the seller. Statistically alone they say that 2/3's of all options expire worthless. So if you're the buyer, you are already down to a 33% chance of winning. If you happen to be buying at the wrong times on top of that, then you're pretty much doomed to be on the losing side of the transaction almost 100% of the time.
There is an easy way to make selling option contracts exciting and more profitable. Recycle!!!
Here is a quick example. Let's say that
Cisco is trading for $15 a share and you want to sell 10 calls expiring 30 days from now @ $15 strike for $1 (you own 1000 shares of
Cisco). If the stock does absolutely nothing over the next 30 days, you will collect 10 x 100 x $1 = $1,000!
But that is the boring part. Throughout the month the stock will move up and down. So let's just say that about a week later the stock is trading at $13.50 a share and your option contract you sold has devalued to only $0.10 cents! Now what I find most people doing is just riding it out and waiting until it expires and goes to zero! Recycle instead!
If the option devalued to $0.10, that means you're up 90% in a week. So why wait three more weeks to collect the remainder $0.10 cents? The odds much better for that option to go up in value than down. What I do here is buy the calls back to close out my position and wait for the stock to move back up. So let's say the stock moves back to $15 or even as little as $14 a share the second week...the option contract will
increase in value. This is when you re-sell for a higher price and repeat the process if available.
Real life example. Just last month, I was able to sell
Cisco calls for $1.53 when it was around $17 a share, then closed my position for $0.28. Re-sold for $1.25 and bought back for $0.08! If I didn't recycle, I would have watched the call devalue to $0.28 cents and shoot back to $1.25.
So in summary, if you ever have your stock move quickly in a direction over a short period of time, it is a good idea to close out your position especially if you have collected 75% of the premium already. You wouldn't want to risk it going back in value and losing your gains. Then just rinse and repeat!
