Hey traders,
If you read my series last week on two big events early in my trading career that turned
Maybe now you’ve decided to sell options. Good call.
But just like any other strategy, there’s a right way and a wrong way to do it.
Over the years, I’ve seen countless people try their hand at selling options, only to mess up and get burned.
Why? Because they didn’t avoid some of the biggest mistakes I see traders make when selling options.
Mistake #1: Selling Options Without Considering the Trend
This is a huge one.
One of the things I preach over and over is to never sell options on a stock that isn’t trending. I don’t care how juicy the premium looks — if that stock is moving sideways or lacks a clear direction, you’re better off just walking away.
A trending stock gives you an edge, plain and simple. It’s like having the wind at your back. If the stock is on a solid uptrend, selling puts has a better chance of success. If it’s trending down, covered calls make more sense. But if it’s just chopping around with no direction? Forget about it.
So always make sure you’re selling options on a stock that’s in a clear, strong trend. It’s a simple rule, but it’ll save you a lot of headaches.
Mistake #2: Picking Stocks That Aren’t Volatile Enough
Another rookie mistake I see all the time is traders picking boring, slow-moving stocks. You know, the kind that barely move up or down each day? Well, guess what? Those stocks usually come with measly premiums on their options.
If you’re not collecting enough premium, what’s the point?
I like to go after stocks that have a beta above 1. Why? Because these stocks move. They might have bigger swings, but that’s what pumps up those option premiums and puts more money in your pocket.
A stock with a beta below 1 means you’re likely dealing with a turtle that’ll barely move. And when a stock barely moves, the premiums are tiny, making the trade hardly worth your time and risk.
Remember, volatility is your friend when it comes to selling options. Without it, you’re selling yourself short (pun intended).
Mistake #3: Setting Strike Prices Too Close to the Stock Price
I get it. You want to collect more premium. But don’t let greed get the best of you.
A lot of traders make the mistake of setting strike prices way too close to the stock’s current price. Sure, you collect a bigger premium, but you’re also exposing yourself to a lot more risk.
You have less of a buffer if the stock drops unexpectedly, and you might find yourself getting assigned or closing out at a loss.
Give yourself some room to breathe. When I sell puts, I like to set my strike price 7-10% below the current stock price. That way, I have a little cushion in case the stock pulls back.
Bottom Line
Selling options is a great strategy when done right.
But like any trading strategy, there are pitfalls you have to avoid.
Pay attention to these common mistakes or you’ll end up frustrated and wondering why your account isn’t growing.
Remember, selling options and “becoming the house” is all about stacking the odds in your favor and playing it smart.
Trade well,
Jack Carter
P.S. My fellow trader Geof Smith has been crushing it with a strategy focused on energy stocks. With election season heating up, he’s got a unique way to profit from all the buzz — while keeping the odds stacked in your favor. Check it out here!
