What exactly are option income or option selling strategies?
Briefly said, option incomestrategies are
designed to take advantage of the time decay of options
by collecting (andhopefully keeping) the premium sold.
is the options greek that has to do with
the decay of time value as you approach expiration
. The time decay of options is a mathematical certainty,and the rate of decay increases exponentially as you approach the expiration date. It is said that70% of all options contracts expire worthless. So everyone should be an options seller (orwriter), right?We'd all be pretty stinking rich if this were the case. In practice, there's tremendous skill,experience, capital and psychological fortitude required to manage the risk of an options sellingstrategy. In addition, what many of those sleek options mentoring courses don't tell you is that
there's a huge difference between the probability of keeping premium at expiration, versus the probably of touching a stop level during the life of the option.
Some of the most popular option income (or selling) strategies include:
credit income spreads
: bull puts, bear calls, iron condors, butterflies, covered calls (or covered writes),and naked call/put selling. Credit spreads entail buying a call (put) and sellinganother call (put) simultaneously for a net credit (taking in more premium thanpaying out).
debit income spreads
: calendars, diagonals and double diagonals. Debit spreads entail buying acall (put) and selling another call (put) simultaneously for a net debit (taking in less premiumthan paying out).What all these income options strategies have in common (probably best seen graphically), isthat they all try to build some sort of a roof-top over the underlying price movement in an effortto contain the price action. In return for a supposedly high probability range of limited income(about 6.7% of the margin requirement), you are subject to the potential for some pretty