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What Is the Best Way to Sell Stock Options?

April 12, 2022 by Daniels Trading| Tips & Strategies

At any given time, an equities options trader can do one of two things: buy or sell. In this article, we will look at how the best way to sell stock options varies according to your situation.

Buy or Sell?

Options traders may either buy or sell contracts. There are several key differences between each action:

  • Buy: When you buy a call or put option, you secure the right to buy or sell shares of stock at a specified price in the future. Profits are theoretically unlimited and are realized above (calls) or below (puts) the contract’s strike price. The trader’s only risk is the paid premium.
  • Sell: When you sell or “write” a call or put option, you guarantee the viability of the contract. Gains are limited to the collected premium, and the assumed risk is unlimited.

For many traders, selling call and put options is a nonstarter because of the potentially unlimited risk exposure. However, other options players invest extensive resources in finding the best way to sell stock options. Read on to learn more about when selling calls and puts can be a lucrative trading strategy:

Flat Markets

Periods of low implied volatility provide the ideal conditions for options traders to sell calls and puts. Implied volatility is the expectation for future price action. In stock options, a contract’s implied volatility is called its “implied vol.”

Contracts with low implied volatility typically command a lower premium because the chance of the contract finishing in-the-money (ITM) above (call) or below (put) strike is minimized.

Assuming low implied vol, out-of-the-money (OTM) stock options are prime candidates to be written. Traders often view writing OTM options with low implied volatilities as the best way to sell stock options and generate cash flows from collected premiums.

Bullish or Bearish Bias

Aside from flat markets, options traders may also write contracts when a decisive bullish or bearish market bias develops. However, the mechanism by which selling stock options generates gains varies greatly depending on the bias.

Perhaps the most traditional means of making money in the stock market is to buy low and sell high. Options can help traders do just that while also enhancing the application of enhanced financial leverage.

Selling stock options to gain long-side market exposure is more involved than the “buy low, sell high” mantra. To secure bullish exposure, you write put options. If the price holds or rises above strike, the put contract expires worthless . This scenario locks in the premium for the option writer.

If you hold a bullish bias toward shares or indices, writing ITM or OTM puts may be the best way to sell stock options.

In the stock market, it can be a challenge to secure short-side exposure to an individual stock or index product. Typically, a trader’s ability to actively short sell equities products is limited to minimal leverage or specialized instruments, such as geared inverse exchange-traded funds (ETFs).

Nonetheless, selling high and buying low is as effective as buying low and selling high. Options traders seek to cash in on a bearish bias by writing ITM or OTM call options. If the price holds or falls beneath strike at expiry, the writer collects the premium as the contract becomes worthless.

If you are bearish toward a stock or index, then writing ITM or OTM puts could be the best way to sell stock options and diversify your portfolio.

What Is the Best Way to Sell Stock Options for You?

Do you have a bearish or bullish market bias? Are you an implied volatility expert? If not, there’s no need to worry. StoneX’s free course, Options Strategies, can help you boost your options IQ in no time.

Don’t delay—enroll in Options Strategies before buying or selling another share of stock!

Option Strategies Course

Filed Under: Tips & Strategies

About Daniels Trading

Daniels Trading is division of StoneX Financial Inc. located in the heart of Chicago’s financial district. Established by renowned commodity trader Andy Daniels in 1995, Daniels Trading was built on a culture of trust committed to a mission of Independence, Objectivity and Reliability.

Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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