The vast majority of my trading strategies involve the selling of option premium. I repeatedly said that I have discovered probability-based trading to be the “secret” to consistent, successful trading business. Most options, something like 80%, expire worthless. Why do I want to own something that expires worthless? I already have enough assets in my life that continually lose value or at some date expire worthless. My vehicle is a perfect example.
If most people buy options looking for that home run and 80% expire worthless, then it did not take me too long to figure out I want to be a seller of those options. Sure, there is some downside to selling the option premium, mainly because of limited profit, but the odds are with you to keep the premium that you sold.
Consider an insurance company and you the purchaser (owner) of the policy. You pay your premium each year to the mega-giant insurance company and hope that it expires worthless. So does the insurance company!
You can’t take that risk that you won’t have a claim, so you pay (buy) the premium. You are one of a million clients, and a certain percentage of the clients will have a claim each year. Obviously, the insurance company, as the seller of premium, puts the odds on its side by spreading the risk over many, many premium buyers. This is precisely what I do as a premium seller.
Another familiar example is the casino. Many of us love them and most understand that we will probably leave with less than we came in with. Statistically, the casino puts the odds in its favor. The casino is the premium seller and you are the buyer.
As the premium seller, you became the insurance company or the casino. Just like in both examples, you can pre-determine your probability of success. The technology and information available to the trader today is incredible, and it levels the playing field for the retail investor who has the knowledge to put this to use.
Learn the simple strategies of probability-based trading. Do enough small trades over an extended period and watch your account equity grow. If you would like to discuss probability-based trading, premium selling or any aspect of trading, please reach out to me.