This article discusses the best options trading strategies for traders to make consistent profits.
Plus, I discuss how to ensure that almost every trade is a winner.
Many people buy calls and puts; that's gambling, not investing (although there are times when it's worthwhile to buy options).
Selling option premium is the only predictable and consistent way to make money as a trader in the stock market.
Key Takeaways
- - Selling (not buying) stock options is the best option trading strategy that yields consistent profits
- - Specifically, selling vertical credit spreads (mostly puts) are the options trade types that I prefer
- - Selling straddles & strangles are NOT a good trading strategy because the call side usually gets tested in a bull market
- - To ensure that almost every trade is a winner, you may have to “roll out” your tested trades for a credit while reducing size and improving your strike price
Best Options Trading Strategies for Beginners
Selling options is your best way to increase your income because the majority of options expire worthless.
This guide is meant to be an option strategies cheat sheet.
I highly recommend selling puts because the stock market has a “long bias”, meaning that it goes up more than it goes down.
While people are oftentimes scared of “black swan” events and market crashes, you can easily protect yourself against a stock market collapse by trading small and also selling puts with a strike price that’s ~10% below the current price of the underlying.
When people buy 100 shares of Facebook, they don't automatically assume that it will go bankrupt.
As a result, it's strange that people say that selling naked options is risky when it's much less risky than buying stock.
When selling puts, I prefer two specific options trading strategies:
- Vertical credit spreads
- Naked puts
However, it's very important, when selling options, to not trade too large because you can be forced to close out a position if you run out of buying power!
Selling options is less risky than buying stocks. Those who claim otherwise are likely not profitable traders
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Trading Examples of Naked Puts and Spreads
Naked puts: Let’s say that Facebook is currently trading at $210. We can sell a put contract with a strike price of $180 that expires 6 weeks in the future.
In exchange for agreeing to buy Facebook if it falls below $180, we receive a credit (“option premium” or “premium”) of $2 / share.
Remember that 1 contract equals 100 shares, so for every contract we sell, we’ll receive $200 (1 contract x $2 credit / share).
If Facebook trades above $180 at the time of expiration, our option expires worthless and we keep the entire $200.
In this trade, our break even point is $178 (excluding commissions), and as long as Facebook stays above $178 then this trade will be profitable.
Remember that there is no guaranteed profit option strategy but BestStockStrategy.com teaches the best option strategy for beginners.
In the past, I preferred selling naked puts because it’s simple, has low commissions, maximizes the premium received, protects against trading too many contracts and it offers a lot of flexibility when rolling the contracts (more on this later).
However, in late 2019 and in 2020, I have primarily begun selling spreads. The reason is that I believe that the enhanced capital efficiency, plus the tail-risk protection, outweighs the additional premium and trade management advantages.
For smaller accounts, selling naked puts may not be capital efficient because it uses up a lot of buying power (so you'll have to trade spreads).
I trade both a large and a small account. My small account was up over 115% in 2019 (Click Here to Watch the Video) and trade both naked put options and spreads.
Vertical credit spreads: Let’s say that Facebook is currently trading at $210. We can sell a contract with a strike price of $180 that expires 6 weeks in the future. In exchange for assuming the risk of buying Facebook at $180, we receive a credit of $2 / share.
This is very similar to the sale of the naked put.
To make this trade a spread, we also buy a contract with a strike price of $170 that expires 6 weeks in the future. In exchange, we pay $1 / share.
In total, we have sold a $180 put, bought a $170 put and receive $1 / share net credit (receive $2 for selling the put and we paid $1 for buying the put).
There are two primary advantages of selling a vertical credit spread:
- It’s a defined risk trade, meaning you have a clearly defined maximum loss
- The buying power reduction is much less (it's a much more capital efficient trade structure)
In the example above, the maximum loss is $10 per share less the $1 credit, so for every contract you sell, your maximum loss is $900 and your maximum gain is $100. If, at the end of six weeks, Facebook is trading above $180, you will make $100 per contract sold.
If Facebook trades between $170 – $180, you’ll be forced to purchase Facebook stock at $180 / share. If Facebook trades below $170, you’ll still be forced to purchase Facebook stock at $180 / share, but you can also sell Facebook at $170 / share, so you will lose ~$900 / contract ($10 per share less the $1 per share in premium).
Don’t worry if this doesn’t make sense at this moment. It’s not rocket science and once you’re exposed to vertical credit spreads with greater frequency, you’ll naturally begin to understand it.
By selling naked puts, your maximum loss would occur if Facebook went bankrupt and fell to $0.
As a result, you’d have substantially greater potential risk by selling naked puts (although we both have a better chance of getting hit by a car tomorrow than Facebook going bankrupt).
Theoretically, you could lose $178 / share (forced to buy Facebook at $180 less the $2 / share of premium received) if Facebook (or META) were to go bankrupt.
Since 1 contract = 100 shares, for every contract sold, you could lose: $178 x 100 shares = $17,800.
Since you can lose $17,800 for every naked contract of FB vs. $900 for every vertical credit spread contract, your online brokerage firm will limit the number of naked puts that you can sell to adjust for the maximum loss difference.
In my opinion, the best options trading strategy is to sell vertical put credit spreads and we provide the best options trading education.
So why did I prefer naked options?
Because your expected return is substantially higher when trading naked options.
There are numerous reasons why trading naked options were attractive to me:
The first is that by trading a naked put I receive twice as much premium ($200 / contract when selling a naked put vs. $100 / contract when selling a vertical credit spread).
Remember, we get paid by selling premium!
Many traders are tempted to sell 5x - 10x as many vertical contracts to collect more premium since their broker allows them to trade substantially more spreads than naked options.
This is the biggest mistakes that options traders make (since they trade too large).
Don't be like most options traders who lose money!
By increasing the number of contracts they hold, they are increasing their risk and commissions / trading expenses.
Additionally, selling vertical credit spreads provides much less flexibility.
Let’s say that Facebook falls close to my strike price, with a naked put, I can easily “roll” that position by buying back the original $180 put and selling a $175 put with an expiration date of 2 - 3 weeks in the future.
This can usually be done for a credit (meaning that I’ll receive money even though I have also reduced my risk by agreeing to buy Facebook at $175, or $5 less than before).
With the vertical credit spread, if Facebook falls, I’ll have to buy back the original $180 put, sell the original $170 put and then roll out both legs by 2-3 weeks.
This is much harder and more expensive to do because the long protective put will be very expensive and I'll have to allocate the time premium that I receive towards buying another protective put option in the future.
In many cases, the time premium would serve me a lot better if it was allocated to reducing the size of the position or rolling to a more favorable strike price, instead of buying the long put option.
Also, because my original credit was less ($100 / contract for the credit spread), my break even point is also higher for the vertical credit spread ($179) vs $178 for the naked put.
My commissions when rolling a vertical credit spread will be approximately 2x more and the credit I’ll receive when rolling out the position will also be less since I’m buying an option when deploying a vertical credit spread.
The biggest mistake I see traders make is they trade too large.
If you can sell 5 naked options, then you shouldn't trade 30 spreads (but some people who trade options do, and they eventually end up losing money).
Vertical credit spreads are especially useful when dealing with expensive stocks such as Amazon and Google which trade for $1,000+ / share and selling a naked put requires too much buying power.
In general, vertical credit spreads are one of my favorite options trading strategies and options trading strategies for beginners (I'll explain more below).
I see a few of my students trade too many spreads. If the underlying stock ends up below the put they've sold, yet above the put they've purchased then their broker will force them to close the position because their account size is not large enough to roll / manage the position and it's also not large enough to take assignment.
Why I Now Prefer Vertical Put Credit Spreads as an Options Trading Strategy
In my opinion, the most successful options strategy is to sell put credit spreads during a bull market and to take ownership of oversold stocks during a bear market and then participate in the upside of the stock.
I trade spreads because of the defined risk characteristics (you have a defined maximum loss when entering the trade).
Plus, vertical credit spreads are more capital efficient.
I trade about 80% spreads and 20% naked options.
The only time I'll consider trading naked options is during periods of high volatility when I'd like to be assigned the shares so that I can participate in the upside of the stock.
Regarding options trading strategies for beginners, I would recommend selling vertical put credit spreads.
I've finally learned how to make consistent money in the stock market: SELL OPTION PREMIUM!
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The way we setup trades permits us to be profitable up to 98% of the time. As a result, the biggest challenge is managing your size and buying power to ensure that if a trade goes against you, you're able to "bend but not break" so that you don't have to close out that position for a loss.
Best Option Strategies with Examples
Let’s assume that we’ll mostly sell vertical put credit spreads, a logical question (using the Facebook example above) is: why would would anyone risk $900 to gain $100?
And the answer is…the odds and expected outcome are strongly in your favor.
If Facebook is currently trading at $210 / share then the chances are ~50% that it will be trading above or below $210 in 6 weeks.
By selling options, as long as Facebook stays above $180, I get to keep the $100 / contract.
Even though we have $30 / share of “cushion” by selling the $180 put (current price of $210 – $180 strike price), it’s possible that the market will correct in the future which can drop the price of Facebook below $180.
If that occurs, we'll roll the position forward in time until it expires worthless.
As a rule of thumb when trading stock options, if your position gets tested, you should roll out (extend duration) for a credit and either reduce your position size or improve your strike price.
Facebook is one of the largest companies in the world. If it happens to trade below $180 then as long as I continue to roll the position forward in time (and receive money every time I do so), then eventually Facebook will likely rally above $180 and that position will expire worthless.
While I never recommend taking ownership of stock – I never want to own actual Facebook stock and would prefer to roll the position until it expires worthless – I recommend only selling puts on positions that you wouldn’t mind owning.
For example, if I would like to own 1,000 shares of Facebook at $180 / share, then I'd be better off selling 10 put contracts of FB with a strike of $180 (as long as the premium received is high enough) because I will receive money ("option premium") in order to open that position.
In general, only about 5% - 10% of my trades will ever get tested; so 90% - 95% of them will expire worthless. Of the 5% - 10% that get tested, I normally only have to roll out the position by 3 - 6 weeks until it expires or I close out the options trade.
And that’s why everyone should risk $900 to gain $100: the probability of profit is extremely high and, even in the worst case scenario, you can roll out the position to continuously increase the amount of premium received while also reducing your risk.
This is why selling vertical put credit spread options is my favorite options trading strategy and trading options is the most successful options strategy and the best option strategy ever.
Making money in the stock market is all about estimating the probabilities of expected outcomes. Selling options is the only strategy where the expected return is exceptionally high.
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Why I Don't Like Iron Condors and Straddles / Strangles
Tastytrade says that Selling at-the-money (“ATM”) straddles and closing out the trade at 25% of maximum profit has a very high success rate.
Option Alpha encourages its students to sell iron flies on ETFs as its preferred options trading strategies (oftentimes with disastrous results).
However, in my opinion, it's an easy way to lose money because the call side will usually get tested (in a bull market).
As a result, selling ATM straddles as an options trading strategy is NOT smart.
For example, let’s say that Facebook is currently trading at $210. I could sell an ATM straddle (selling a put and a call with a strike price of $210 that expires in 6 weeks) and receive ~$8.50 / share
If I sell 10 contracts, that means I’ll immediately receive $8,500 in premium – that’s a lot of money!
However, the call side usually gets tested in these trades.
We trade market leaders like FB, LMT, AMZN, etc. Long-term, these stocks appreciate in value.
I believe that traders should NEVER enter a trade with the expectation that they will have to roll / manage the position.
When selling straddles (or strangles, iron flies, iron butterflies or iron condors) there's a very high probability that you'll have to manage the position.
Rolling positions is also VERY stressful.
And by selling a straddle, and selling a call those trades will usually get tested which will lead to stress and trading losses.
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Another issue that I have with straddles (iron flies, iron condors, strangles etc.) is that they require more maintenance and babysitting.
If I sell the $180 vertical put spread on FB, I can login to my account once a day for a few minutes.
But, if I sell the ATM straddle, then I’m going to be much more anxious if FB begins trading significantly above or below $210.
Yes, I realize that profiting from straddles, and closing out at 25% of maximum profit, has a decent probability of profit (I'm not disputing that), but when factoring in the increased closing trade commissions and the stress of monitoring the position, I prefer to stick with naked options or vertical credit spreads and do not trade straddles / strangles / iron condors / iron flies as viable options trading strategies.
Options Trading Strategies Conclusion
There are many stock options strategies, but the best one is to sell put options, preferably vertical put credit spreads (when we're in a bull market).
When we're in a bear market, then you can switch to selling call credit spreads.
It's important to avoid the temptation to trade too many contracts when selling vertical credit spreads.
If any of your positions get tested, you should roll out for a credit and reduce your size or roll to a more favorable strike price.
Selling ATM straddles, and managing the position at 25%, while it has a positive expected return, is not something I encourage because of the higher commissions, increased anxiety / time required to monitor the position and the high likelihood of the calls getting challenged.
July 2019 Update: Option Strategies with Examples
For much of this year, I have only been selling puts.
And I've been incredibly patient.
In my opinion, selling calls on a regular basis requires way too much babysitting and stress.
Over the past 10 years, the S&P 500 has increased in price by ~450%.
A trader simply cannot collect enough premium to overcome bullish drift while holding onto losing positions that have negative delta (Tastytrade recommends keeping short delta, which is usually a mistake).
While I've made money selling calls (primarily in Q4 of 2018), I am, in general, very hesitant to sell calls.
My results have been great in 2019. My smaller account is up 75% YTD and my larger account is up ~40% YTD.
Oftentimes less is more... just because you CAN sell calls does NOT mean that you should. Keep things simple and stick to what works.
Your options trading strategies do not have to be complicated for them to be effective.
January 2020 Update: Options Trading Strategies & Capital Efficiency Discussion
In 2019, I was up ~117% with zero losing trades all year (I won every trade). You can watch a video summary here: https://www.youtube.com/watch?v=183yCNWmfxY
I mostly trade vertical put credit spreads at this moment (January 2020).
I have not been trading much in 2020 because the market is at an all-time high and there aren't many good opportunities.
Spreads are much more capital efficient and they also provide downside risk in case of a sudden selloff.
When a trader sells a naked option, their broker usually reduces their buying power by ~12% - 20% of the maximum loss.
For example, if I sell a $200 naked put in FB, then my available buying power will be reduced by $2,400 to $4,000 for every contract that I sell.
If I sell a $200 / $190 put credit spread, then my buying power will only be reduced by $1,000 (less the amount of credit I receive).
Vertical credit spreads reduce your available buying power by the width of the strikes less the amount of credit that you receive.
As a result, structuring your transactions as spread will permit you to use up ~3x - 5x less buying power when compared to a naked option.
Another major change that I've implemented in 2020 is to be much more patient.
I actually trade LESS and am much more patient and disciplined.
August 2020 - Best Options Trading Strategies Update
The stock market has been very volatile in 2020.
We have been trading naked options to take advantage of an elevated VIX.
Once the VIX falls below 20, then we'll switch back to selling vertical credit spreads.
We have also been less directional and making more money by selling out-of-the-money calls AND puts.
I believe that I have the best option strategy ever, and that strategy entails being patient and disciplined and not over trading.
In my live options trade alerts, I provide option strategies with examples.
Now, please realize that there is no guaranteed profit option strategy, however I do believe that I have the best option strategy for beginners.
I provide the best options trading course and the best options trading education.
It's important to view options as a strategic investment and many people are making a living by selling options.
Our trading strategy allows for maximum trading profits with minimal risk - we regularly close out trades early and don't assume much directional risk.
We are still making around 3.5% every month consistently.
I have also been using a new options trading strategy to take advantage of price extremes. It's provides the upside of buying options, yet with a substantially higher probabilty of profit.
My options trading watchlist still has ~15 securities and I am still very disciplined when it comes to not using too much buying power.
My live options trade alerts provides the best options trading education for those who are interested in learning more.
In July 2020, we made a lot of money by fading the euphoric move in TSLA. Tesla moved from $950 to over $1700 in around 2.5 weeks and we were able to sell calls and roll the positions while stil collecting substantial premium.
This is why it's important to trade small and ensure that you have adequate buying power.
If you traded too large, then you would have been forced to close out the position for a loss prior to Tesla's price stabilizing.
Best Option Trading Strategy - 2022 Update
There have been some changes and I made some slight adjustments to the trading strategy.
I'm currently trading more indices (QQQ and SPY) than previously.
Additionally, I've further reduced my watch list.
I also am incorporating buying, and going long, stocks and also buying options during specific periods.
The best option trading strategy must be able to be profitable in all market environments.
By buying options, you'll be protected against large volatility expansion events.
And by buying stocks, specifically when they're undervalued, you're able to participate in the upside.
That's why I believe that the best option trading strategy includes long stock / indices, short options and long options.
Best Options Trading Strategies Conclusion
These are the best options trading strategies that you can implement to improve your trading.
If you're interested in the best trading courses, then you're welcome to enroll as a student and trade options.
If you want to learn the best strategy to maximize your gains while minimizing losses, then I encourage you to enroll as a student at https://beststockstrategy.com/memberships/
Frequently Asked Questions (FAQs)
What is the best stock strategy?
The best stock strategy is to sell put options on stocks that you want to own. Then take ownership of those stocks if the options expire in-the-money. By doing this, you'll be able to purchase stocks at a discount while also participating in the upside potential of the stock.
Is there a guaranteed profit option strategy?
There is not a guaranteed profit option strategy, however you can sell put options on market-leading stocks and then take ownership after these stocks have dropped 15% - 20%.
Then, you can participate in the upside of the stock.
Additionally, by buying options during periods of high complacency, you can decrease portfolio volatility while also making money during a stock market crash.
What is the most successful options strategy?
Sell put options on market-leading stocks, with strong brands, and then take ownership after these stocks have dropped 15% - 20%.
Then, you can participate in the upside of the stock.
Additionally, by buying options during periods of high complacency, you can decrease portfolio volatility while also making money during a stock market crash.
