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#326 - How Do You Make Money Selling Options?: Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question, “How do you make money selling options?” I think this is one of the biggest questions that many new investors...

#326 - How Do You Make Money Selling Options?: Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question, “How do you make money selling options?” I think this is one of the biggest questions that many new investors...

A partire dalThe "Daily Call" From Option Alpha


#326 - How Do You Make Money Selling Options?: Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question, “How do you make money selling options?” I think this is one of the biggest questions that many new investors...

A partire dalThe "Daily Call" From Option Alpha

valutazioni:
Lunghezza:
10 minuti
Pubblicato:
Aug 14, 2018
Formato:
Episodio podcast

Descrizione

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question, “How do you make money selling options?” I think this is one of the biggest questions that many new investors ask. In particular, many new options traders ask how exactly do we make money on a consistent basis, generating income for our portfolio by selling options. There’s a couple of bullet points I want to go through here that I think touch on a lot of the big rocks that we talk about in our strategy, so the really important things that you have to master. In many regards, if you master these couple of big rocks, these really important key concepts, everything else should generally fall into place or it should be a lot easier to generate money selling options. Now, as we go through these, I want you to continue to remember or reference the concept of both the casino business as a casino owner and the insurance company business as again, an insurance company owner because the options trading market on the option selling side is very much like those two business structures. There's a lot of overlap and a lot of similarity and it's no wonder why in many respects, Warren Buffett is one of the biggest option sellers and single individual biggest options traders in the market because he does option selling strategies which many people don't know and he publicly discloses all of this in his quarterly and annual reports for Berkshire Hathaway. Now, that also means he does this because he's also in the insurance business. He sees the value in this type of framework, in this type of philosophy not only in the equity markets because he’s selling option premium outright, but also in the insurance business because he's selling insurance which is very much the same thing. The way that we make money selling options is purely by getting paid the volatility premium. If I could narrow it down to one thing, the thing that makes money, the edge that we have in option selling is the volatility premium, this concept that when options are priced on a forward-looking basis or a future value basis, they are priced assuming that the stock makes huge moves, but the reality is that the stock on a consistent basis will not meet up to those expectations or outperform those expectations. To put this in hopefully better terms, if the market participants are expecting that the stock is going to move 10% over the next month, we may actually see that the stock only moves 8% and it's the same concept that insurance companies use with actuaries and with probabilities and death rates, etcetera. They basically assume that people are going to get into a car accident or their house is going to burn down many more times than it actually might happen in reality. And so, they base all of their insurance premiums, all of the money that we pay as individuals to insurance companies to ensure our stuff, they base that off of higher expected default or higher expected fire or crash rates or ratios than what might actually happen in reality and that difference, that premium is where they make their money. As option sellers, we are selling options and taking in this lower payout that most people don't want to take in, but in exchange for doing that, these smaller premiums on a consistent basis, we have a much higher probability of success. It’s again, very similar to a casino or to an insurance company. Casinos will take in small… Basically, I call them donations. But they take in small bets and every so often, they might have to pay out a jackpot, but it never overshadows the small bets that they take in on a consistent basis. With insurance companies, they take in small amounts of premium. Maybe you pay $200, $300 a year for your car to protect it against the crash and every so often, people do get in a car accident unfortunately and the insurance company has to pay back the value of that car, so $30,000, $40,000, but it never overshadows
Pubblicato:
Aug 14, 2018
Formato:
Episodio podcast