Recently, I attended a seminar talking about making income through selling options. my friend has written a blog article summarizing the event. I agree with him that this kind of strategy is never as simple as it appears to be.
If you follow my blog, you know that I am often skeptical of the unrealistic simple and easy money making strategies promised by investment courses. One can never make consistent return by attending a 3 day course or buy a money making system. Investment requires hard work!
As a retail investor (professional investors are different), you just cannot sell weekly options every week and think you will make money. Take S&P500 ETF (SPY) for example, the volatility has fallen dramatically in the past 6 months, thus the premium is no longer great.
Last night, SPY closed at $137.73, say you take a not so safe position (trying to earn a high premium) to sell a naked Mar Week 2 Put with strike price of $135 (only 2 price away), your premium is merely $0.29/share. If you sell 1 contracts (100 shares), your premium collected is only $29 (before commission). However, take a look at the potential loss should market suddenly crashes.
| Price | Profit / Loss | ROM % |
|---|---|---|
| 101.25 | ($3,346.00) | -133.27% |
| 114.86 | ($1,985.10) | -79.07% |
| 129.19 | ($552.50) | -22.01% |
| 134.71 | $0.00 | 0.00% |
| 135.00 | $29.00 | 1.16% |
| 143.51 | $29.00 | 1.16% |
| 157.84 | $29.00 | 1.16% |
| 172.16 | $29.00 | 1.16% |
You can make some money for a few month, but one trade can wipe you out if it is not managed properly. And managing risk has always been the weakest link of retail investors.
Weeklies are just too close to the expiry dates. I think it is pretty risky when there is any sharp move in the underlying.