If you are interested in options trading, or active trading, you may have heard some horror stories.
People trade too large and end up losing everything, becoming a cautionary tale for other traders.
So, which strategy is best: buying options or selling options?
David Jaffee of BestStockStrategy.com understands that there are significant risks associated with selling options, but there is also a high probability of profit.
If you want to become a successful trader, you have to learn how to balance risk and reward.
Keep reading to learn more about buying options versus selling options, including the exact strategies David Jaffee uses to mitigate risk.
Is it more profitable to buy or sell options?
Selling options offers a greater probability of profit, allowing traders to make money selling options.
Buying options comes with a defined risk because you know your maximum potential loss when you enter the trade.
However, there is a low probability of profit when buying options.
The expected volatility is almost always larger than the actual volatility, so you are overpaying for risk when buying options.
While you can potentially make a lot of money buying options, the strategy is similar to purchasing lottery tickets.
When it comes to selling options, there is a higher probability of profit but also a greater level of risk.
Is selling options risky?
Some traders shy away from selling options because of the risk involved and also because earning ~3.5% a month is not exciting to many traders.
When you buy options, the maximum risk is the amount of premium paid for the position.
With defined risk, some traders are more comfortable buying options than selling options.
When you sell options, your enemy is the expansion in volatility during the small percentage of times that actual volatility is greater than expected volatility.
Instead of being concerned with where the stock is trading relative to the strike price that you sold, you should be more concerned about volatility expansion.
When volatility expands, almost all of your option positions will show a loss and you have to defend those trades.
Defending your trades can use up a lot of buying power.
You will not be able to deploy that capital to new positions, and you will miss out on opening profitable new trades.
If you trade too large and run out of buying power, your broker could force you to close your positions at the most inopportune time.
This could force you to sustain massive losses.
Fortunately, David Jaffee of BestStockStrategy.com teaches his students to manage this risk and avoid major losses.
What is the best way to consistently make money when trading options?
Despite the risk involved, the best way to consistently make money is by selling options.
While buying options has defined risk, the risk is actually higher because your probability of profit when you buy options is always below 50%. Meaning that your expected profit when buying options will always be negative.
Your expected profit when selling options will always be positive.
Like the lottery, the more you play, the higher probability that you will lose money when buying options.
If you want to become a profitable trader, selling options is the best way.
How can you mitigate risk when actual volatility is greater than expected?
David Jaffee teaches his students how to mitigate risk in order to minimize losses when selling options.
When VIX is trading under $20, David Jaffee sells vertical credit spreads to neutralize the risk of volatility expansion.
By buying the long call or long put, you're protected because the long option gains value as volatility expands.
When VIX is trading over $20, David Jaffee prefers to sell naked options.
Should you sell options?
In general, the only times you will lose money when selling options is if you run out of buying power and are forced to close a position.
David Jaffee noted that even when Amazon fell during March of 2020, those with enough available buying power could have rolled their position forward and realized a profit in April.
Ultimately, selling options requires more discipline, finesse, and patience than buying options.
If you want to play the lottery and risk losing money, buying options may be the right strategy for you.
However, if you are looking for the best long-term options trading strategy, it is time to learn how to profitably sell options.
Learn How to Sell Options
Through his online options trading course, David Jaffee has taught more than 1,500 students how to successfully sell options for a profit.
All traders can benefit from his comprehensive course, including both beginner and advanced traders.
In 12 easy-to-follow lessons, David Jaffee teaches his students how to mitigate risk, minimize their losses and maximize their trading profits.
In fact, you can learn a strategy where you'll be expected to win ~95% of your options trades.