How To Sell Long Term Options

Selling (rather than buying) options is one of the biggest advantage options traders have. The reason is simple: Around 80% of options expire worthless. This gives the seller a leg up and allows them to bank profits over and over again. But even though this tends to be a short term game, there is a way to sell long term options – and win.

But before we get into the long term strategy, let’s review the basics of options.

Equity options can be bought or sold in the open market. It is a zero sum game: If someone buys put options thinking the stock is going lower, someone has to be on the other side of the trade believing the stock will go up (or sideways). One of these players will win, and the odds often favor the seller.

The seller benefits due to market volatility, which moves stocks in both directions (up and down), and time decay, which option prices are in a constant battle against. Time decay is the reason options trading is often a short term game.

Sometimes being long options is a winning strategy. When volatility is low and not rising, stocks are ripe to continue rising, and options are priced more cheaply. There are various ways to sell options in this environment. My preferred method is to sell deep out of the money options (calls and/or puts), collect the premium, and then let options go to zero.

The advantage of selling out of the money options is the high probability that the option finishes out of the money. This is determined by the level of market volatility relative to the current trend. If volatility is in a rising trend, you can bet those premiums will rise, even if there is a great deal of distance from the price/short strike.

When trading options, it is important to manage and define risk. You can easily do this by selling a put spread (if bullish) or a call spread (if bearish). You can combine these two and create what is known as a condor. This strategy allows you to collect premium for bullish and bearish plays simultaneously.

With any risk taking venture, there are trade-offs. Since we are playing a high probability trade, we are paid a smaller premium. However, it also means that time is on our side. If there is only modest market movement until expiration, we stand a great chance of winning.

This article was updated on May 11, 2023.