Selling Put Options: For Investors Who Want a Little Bit MoreAdvice to the Advisor
There are two main reasons, explain James Cordler and Michael Gross, writing in Futuresmag.com, for the popularity of option selling:
- investors’ ability to generate reliable income
- generally positive performance under varying market conditions
However, the authors caution, there is no free lunch here, and option selling has its own set of risks. Two mistakes Cordler and Gross see investors make include:
- selling too many options relative to account size
- being too concentrated in a particular market sector
Dave Gilreath, manager of the Sheaff Brock Index Income Strategy, agrees. Being over-leveraged is the biggest investor misstep when it comes to option selling, Gilreath explained to our Institutional editor. To avoid investors over-concentrating in single positions, Sheaff Brock wealth managers have been helping investors achieve diversification and manage risk in two ways:
- Using index options, exposing clients to an entire market segment—or to the market as a whole—with one trading decision
- Keeping the put option exposure at or below 15% of the value of the client’s collateral account
“Options are a versatile but complex product,” explains the Options Industry Council (OIC), an industry cooperative created to educate the investing public about the benefits and risks of exchange-traded options. OIC organizations have one goal in mind, the website says, and that is to:
“provide a financially sound and efficient marketplace where investors can hedge investment risk and find new opportunities for profiting from market participation.”
There are always active buyers of put options, investors who want to “insure” their portfolio value, Gilreath explains. Meanwhile, investors who desire more income sell put options and assume that risk and volatility in exchange for a premium. The core belief underlying any option selling strategy is that the market will grow—or at least maintain—its overall worth in the future.
Selling put options is a strategy for investors who want “a bit more” out of their portfolio performance, in exchange for a bit more risk.