How does option selling work?

When you begin to trade stocks, you will always desire to book profits to a greater extent, isn’t it? It is certainly possible provided you adopt option selling while you are on trade.

I have penned a few strategies that can benefit you in developing your option selling trade plans and made a comparison with option buying.

Option Buying:

As an option buyer, my underlying assets will lose their value if the stock market maintains at the same level, or the wind blows against your asset values. Henceforth, you must remember your long asset shall retain a profitability of about 33 percent in case you continue to be an option buyer.

Option Selling:

Contrary, if you engage your short assets in options sellings then you will tend to make profits in two out of three scenarios. These scenarios are bull market, bear market and consolidating market.

Scenario (Bull Market): It is the situation when the market trend is moving in your direction and if you sell a put, you will make a profit.

Scenario (Bear Market): The same holds true when the market stocks are moving slowly in your direction.

Scenario (Consolidating): You may enter a trading environment once you find its movement conducive to your option selling. But, over a period, you might lose patience due to its very slow movement of stock price. In such situations, you are most likely to lose time value.

Option Selling Strategies:

You can adopt trading strategies for option selling in either of  the ways and they are hedging based options, or direction option selling.

Hedging Based Options:

Hedging Based Options is mostly applicable for the risk averse traders and I do prefer these neutral trading strategies, independent of the bearish/bullish market.

This kind of hedging based options are usually adopted by the traders/investors in the Indian stock markets. More significantly, these options are utilized in the index options (Nifty & Bank Nifty).

When I implement hedging based options then I utilize the selling strategies such as straddle, strangle, and butterfly.

Directional Options Selling Strategies

Directional options selling involves traders in selling stocks based on the market movements (bearish/bullish).

For selling analysis, at times, I seek aid of the chart patterns for technical analysis. So, for the bearish market, I go for put option and for bearish market adopt for call option selling.

In option selling, I do take the aid of support and resistance levels.

Right Strike for Option Selling:

You must be cautious in selecting the right strike otherwise the risk factor shall enhance exponentially. Therefore whenever you desire to sell a call option then you are recommended to sell the strike at the resistance level or slightly above the resistance level.