Weekly Options – Risk
While a lot of folks think – or are told – that selling options – including weekly options – is an extremely risky way to play the markets – option selling can in fact be very low risk depending on the scenario that you are selling options in.
One very low risk way to sell weekly options is to sell a put option on a stock that you want to purchase anyway.
Weekly Options – Selling Example
For example, let’s say you’ve been wanting to purchase the stock XYZ if it ever reaches the 45 dollar level – and low and behold the stock dips down to around 50 dollars one day.
This is a stock that you want to purchase at 45 – you think that it would be a great bargain at that level. And you have the cash in your account to purchase it.
What you can do is sell the 47.5 weekly options put which let’s say will bring a credit into your account of $2.50. You sell this put option naked.
Here is what you have done: You have accepted the responsibility to ‘take’ the stock at $47.50 IF the stock is trading at or below that strike level on expiration day. If it is trading at or below that strike level on expiration day – you will have the stock put to you and you will wake up to find the shares sitting in your account.
If you DO have the stock put to you at that level – because you received a credit of $2.50 when you sold that weekly options put – you will now basically own the stock at $45.00 ($47.50 minus the $2.50 credit you received). And that is what you wanted anyway – to own that stock at $45.00
Weekly Options – Cake and Eat It Too
However – if the stock does NOT finish at expiration day at or below the $47 level – you will be able to keep that $2.50 credit as profit – and if you wish to – you can turn right around and do the same thing over again every single week. And over and over again.
I have seen situations where a trader who wanted a stock did this type of weekly options trade – and the stock just fluctuated and remained right above where the trader was selling his puts at – and he was able to bring in a nice income over and over again – just waiting for the stock to be ‘put’ to him at a level he really wanted it at anyway.
Stay tuned – next time we will get into a really cool variation on this trade – as well as go into other types of low risk option selling strategies.
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