Keeping a Safe Distance as an Options Seller
As an options seller, my goal is to earn the premium, so my primary focus is to avoid being exercised. Here are my thoughts on surviving as an options seller. ![]()
If we think of buyers and sellers as opposing forces, then the frontline is the current stock price. As options sellers, we're like the support team and clearly not equipped to battle directly with major players. To survive, I believe we should focus on two main points: choosing the right underlying assets and setting an appropriate safety distance. Finally, choosing the right strategy is key.
1. Choosing the Right Underlying Assets
Select Large-Cap Stocks or Indices: Large-cap stocks and indices are less prone to manipulation and have more balanced buy and sell pressures. Avoid small-cap stocks and their options.
Prefer Profitable Stocks: These have more reliable valuation models, making it easier for individual investors to estimate value. Recommended assets include $S&P 500 Index(.SPX.US$ , $Apple(AAPL.US$ , $Tesla(TSLA.US$ , and $Futu Holdings Ltd(FUTU.US$.
2. Setting an Appropriate Safety Distance
Different assets require different safety distances. Generally, look at the historical maximum daily price movement of the asset as a reference:
For $Tesla(TSLA.US$ : Historical maximum price movements of about 20% suggest a strike price 20% away from the current price is relatively safe. After Tesla joined the index, daily moves of 10% became rare, making a 40% distance over five trading days very unlikely to trigger exercise.
For $Apple(AAPL.US$ or $S&P 500 Index(.SPX.US$ : These tend to have smaller fluctuations, so a strike price 15% away from the current price should have a low probability of being exercised.
3. Choosing the Right Strategy
Selling options for premiums is speculative, so survival is paramount. The strategy can be summarized as follows:
Retreat When Necessary: If the position moves against you beyond your safety distance, cut losses quickly. For example, I once sold options on $Gaotu Techedu(GOTU.US$ at a strike price of $25 when the stock was at $50, but the stock crashed to $20. I managed to exit at $40, preventing complete loss.
Adjust Positions: If your position is working in your favor, consider closing the profitable options and opening new ones closer to the current price. For instance, if you sold a $600 put option on Tesla when it was $1,000, and Tesla rose to $1,200, close the $600 option and sell an $800 put option.
Use Small Positions in Uncertain Markets: When the market lacks clear direction, sell options closer to the current price with smaller positions. Emphasize small positions to mitigate risk.
Strike Hard at Extremes: When a stock reaches an extreme valuation, it’s an opportunity to sell options aggressively. For example, if $Futu Holdings Ltd(FUTU.US$ drops to a valuation low with a PB below 1 and PE below 10, selling a $15 put can yield substantial premiums. Conversely, if Futu hits $200, selling calls is advisable.
Final Thoughts
Selling options involves leverage. Ensure you have enough funds to cover potential stock purchases when selling puts and enough capital to buy stock if selling calls to maintain a covered position. While buying options can yield high returns with low probability, selling options offers a high probability of small gains. Thus, safety should be the top priority.
Safety, safety, and more safety should always guide your decisions. If you have additional tips for ensuring safe options selling, please share.
Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only.
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Stockmarker : May I ask by selling option, the broker will need to hold a value as a collateral as a max loss in case it go side way , whatif my sell option got reassigned, will I still get back my collateral ?