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.
Even so, David Jaffee believes that there are certain ways to integrating long options into your portfolio to mitigate portfolio volatility (in conjunction with being short premium).
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 the possibility of earning ~3% a month is not exciting to them.
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 (and also the underlying stock moving past its expected move).
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 new 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 losses.
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 and buying options at certain times to reduce portfolio volatility.
While buying options has defined risk, the expected outcome is oftentimes negative 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.
Even so, the magnitude of your wins when buying options are much larger and the magnitude of your losses when selling options are much larger.
If you want to become a profitable trader, combining both selling and buying 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.
There are other strategies to mitigate risk that are explained in the options trading course at https://beststockstrategy.com/memberships
Should you sell options?
In general, options sellers usually lose money when they 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.
If you are looking for the best long-term options trading strategy, it is time to learn how to profitably sell options (and buying options at the right times).
Learn How to Trade and Sell Options
Through his online options trading course, David Jaffee has taught more than 1,500 students how to successfully sell options.
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 up to 98% of your options trades.
Frequently Asked Questions
Is it better to buy or sell options?
Traders should BOTH buy and sell options. Sell options during periods of high volatility, or if they want to own the stock or index, and buy options to mitigate portfolio volatility.
What stocks are best to buy or sell options?
Large capitalization stocks and indices are best to mitigate risk.
How is the win rate so high when selling options?
It's about probabilities. Traders collect small premium for a high probability of profit. Whereas they must manage the position if the trade goes against them and their risk is oftentimes much higher than the premium collected (unless they buy options to mitigate that risk).
What is a winning and successful options trading strategy?
A winning and successful options trading strategy includes both buying and selling options in a disciplined manner to collect premium while also protecting and mitigating downside risk.