Most beginners think they can only profit by buying options, but they can also profit by selling options. Options buying offers gains, but it comes with significant risk. This is why many traders prefer options selling.
Options selling focuses on probability and time, instead of predicting the market. Many traders generate consistent income from option selling. If you are at the beginning of your journey into options trading, then this article is for you. In this article, you will learn what options selling is, as a beginner, what option selling strategies you can use and how.
What is Option Selling?
In option selling, traders sell an option contract and receive a premium from the buyer. The seller profits when the option expires worthless or loses value before expiry.
For example,
- When you sell a put option, you expect the underlying stock price to remain above a certain level.
- When you sell a call option, you expect the price to stay below a certain level.
Options buyers benefit if the options value increases, but options sellers benefit from time decay. Due to time decay, option values decrease as expiry approaches. However, naked option selling can carry unlimited risk, which is why beginners should use defined-risk strategies.
Bull Put Spread Strategy for Beginners
Options selling carries a very high risk, due to which many options strategies are not recommended for beginners. But there are a few strategies that beginners can use. Among those, the bull put spread is the best strategy for beginners.
The bull put spread is used when a trader expects the market or stock to remain above a certain level or move slightly upward. In this strategy, the trader sells one put option and then buys another at a lower strike price with the same expiry date.
For example, suppose the Nifty is trading above 18500. Then
- Sell 18000 Put at ₹200 (you will receive the premium)
- Buy 17800 Put at ₹150 (you have to pay the premium)
In the above case, the trader will receive ₹50 net, which becomes the maximum profit. To profit, Nifty should trade above 18000. If the market stays above 18000, then both options will expire worthless, and the trader can keep the entire premium as profit.
If the market falls below 18000 but stays above 17800, then the strategy will start to eat your profit. The strategy will be in loss if it falls below 17950. If the market falls below 17800, traders will incur a maximum loss of ₹150.
Why the Bull Put Spread is Suitable for Beginners
There are several reasons why beginners prefer this stock market trading strategy.
- The strategy carries limited risk, and the trader can choose how much loss they can bear.
- Because the strategy is hedged, brokers require a lower margin compared to naked selling.
- Options sellers benefit from theta decay or time decay. It always works in your favour.
- Since the market only needs to stay above a certain level, the probability of profit is often higher.
Conclusion
Although selling options can be a very effective way to make steady money in the stock market, novices should steer clear of writing naked options because of the high risk involved. Rather, they ought to begin with defined-risk tactics such as the Bull Put Spread.
This strategy offers a balanced approach by combining premium income, limited risk, and a higher probability of success. With proper understanding, discipline, and risk management, beginners can gradually build confidence and experience in option selling. To learn more, enrol in option selling courses from Upsurge.club.
