How to Get Paid for Saying 'Maybe': Selling Options Explained

Selling options is a powerful strategy that allows traders to generate income by collecting premiums from other market participants. Unlike buying options, where you pay a premium and hope for a big move, selling options puts you in the position of the "house" – you collect premiums upfront and profit when options expire worthless or lose value. The two main approaches are selling covered calls (selling call options against stock you own) and selling cash-secured puts (selling put options with cash set aside to potentially buy the stock). These strategies can create consistent income streams with defined risk parameters.

Importance for Trading

Understanding how to sell options is crucial because:

• It provides a way to generate regular income from your portfolio
• It allows you to profit from time decay rather than fighting against it
• It gives you higher probability of success than buying options
• It enables you to get paid while waiting to buy stocks at lower prices
• It helps you enhance returns on stocks you already own
• It works well in sideways or slowly trending markets where buying options often fails

"Buying options is like buying lottery tickets—exciting but low probability. Selling options is like selling lottery tickets—less exciting but much higher probability of profit."

The Real Estate Story

Meet Richard, who owns several properties and has developed a unique approach to real estate that perfectly illustrates how selling options works in trading.

Selling Covered Calls: The Rental Property Approach

Richard owns a house in a nice neighborhood that he bought years ago for $200,000. The house is now worth about $300,000, and he's considering selling it eventually, but not in a hurry.

Instead of just waiting for the perfect time to sell, Richard has developed an interesting strategy. He lists the house with a real estate agent with specific terms: He'll accept $320,000 (above current market value), but the buyer must pay $2,000 for a 3-month "purchase option" that gives them the exclusive right to buy at that price.

"This arrangement is essentially what traders call a covered call," Richard explains to his friend. "I already own the asset—the house—and I'm selling someone else the right to buy it from me at a specific price within a specific time period."

His friend asks why anyone would pay for this option.

"The buyer might believe housing prices in this neighborhood are about to surge," Richard answers. "They're willing to pay $2,000 now to lock in a $320,000 purchase price. If prices jump to $350,000, they've made a great deal despite the $2,000 fee."

"What happens if housing prices don't rise that much?" his friend asks.

"If prices stay flat or rise just a little, the buyer probably won't exercise their option to purchase at $320,000," Richard explains. "They'll walk away, and I keep the $2,000 fee. I can then offer another 3-month option to someone else and collect another fee."

Over the course of a year, Richard collects four such fees totaling $8,000 without selling his house. That's a 4% return ($8,000 ÷ $200,000) on his original investment just from selling these options, in addition to any appreciation in the property's value.

"Selling covered calls is like renting out the upside potential of something you already own. You collect rent (premium) in exchange for limiting your potential gains."

This illustrates how selling covered calls works in options trading. Just as Richard collected premiums for giving someone the right to buy his house at a specific price, investors can sell call options against stocks they own to generate regular income. If the stock price stays below the strike price, the option expires worthless and the seller keeps the premium. If the stock rises above the strike price, the stock may be called away (sold), but the seller still keeps the premium plus any appreciation up to the strike price.

Selling Cash-Secured Puts: The Property Buyer Approach

Richard is also interested in buying another rental property, but only if he can get it at a good price. He's been eyeing a condo listed at $250,000, but he thinks it's slightly overpriced and would only want to buy it if the price drops to $230,000 or below.

Instead of just placing a lowball offer or waiting for the price to drop, Richard approaches the seller with an interesting proposition: He'll pay the seller $1,500 now for a guarantee that he can buy the property for $230,000 anytime in the next 3 months if he chooses to. If the market price drops below $230,000, Richard will likely exercise this right. If prices stay high, he'll walk away, and the seller keeps the $1,500.

"This arrangement is what options traders call a cash-secured put," Richard explains. "I'm paying the seller to guarantee me a specific purchase price, and I've set aside the money to potentially make that purchase."

The seller accepts this deal because:

1. They get $1,500 immediately, which they keep regardless of what happens
2. They still have a chance to sell at their full asking price to someone else during these 3 months
3. If the market does drop and Richard buys at $230,000, they've still gotten $1,500 more than they would have by just lowering their price

"The beauty of this approach," Richard notes, "is that I either get the property at my desired price, or I make money while waiting for prices to drop. It's a win either way."

"Selling cash-secured puts is like getting paid to place limit orders. You collect a premium now for agreeing to buy at a lower price later—a price you were willing to pay anyway."

This demonstrates how selling cash-secured puts works in options trading. Just as Richard collected a premium for his willingness to buy the property at a lower price, investors can sell put options to collect premiums while agreeing to buy stocks at lower prices. If the stock stays above the strike price, the option expires worthless and the seller keeps the premium. If the stock falls below the strike price, the seller may have to buy the shares, but at a price they were willing to pay anyway, plus they keep the premium.

Using Option Selling in Real-Time Trading

How to Sell Covered Calls for Income

Real-time example: You own 100 shares of Microsoft at $330 per share and believe it will likely trade sideways or slightly up in the coming month.

How to implement the strategy:

1. Sell a call option with a strike price of $340 (above current price) expiring in one month
2. Collect a premium of $5 per share ($500 for one contract covering 100 shares)
3. This premium is yours to keep regardless of what happens next

"Selling covered calls is like getting paid rent on stocks you already own. The premium is yours to keep, in exchange for potentially limiting your upside."

Action plan:

• If Microsoft stays below $340 by expiration, the option expires worthless, and you keep both your shares and the $500 premium (1.5% return in one month)
• If Microsoft rises above $340, your shares might be called away (sold), but you still keep the $500 premium plus the $10 per share gain from $330 to $340
• You can repeat this strategy monthly to generate consistent income from your holdings

How to Sell Cash-Secured Puts for Income and Potential Acquisition

Real-time example: You're interested in buying Apple at $160, but it's currently trading at $170. You have $16,000 available to potentially purchase 100 shares.

How to implement the strategy:

1. Sell a put option with a strike price of $160 (below current price) expiring in one month
2. Collect a premium of $3 per share ($300 for one contract)
3. Set aside $16,000 in case you need to purchase the shares
4. This premium is yours to keep regardless of what happens next

"Selling cash-secured puts is like getting paid to wait for a stock to go on sale. You collect income now while agreeing to buy at a discount later—a price you wanted anyway."

Action plan:

• If Apple stays above $160 by expiration, the option expires worthless, and you keep the $300 premium (1.9% return on your $16,000 for one month)
• If Apple falls below $160, you'll likely be assigned and purchase 100 shares at $160, but your effective cost basis is $157 ($160 - $3 premium)
• You can repeat this strategy until you acquire shares or continue generating income

How to Select the Right Strike Prices

Real-time example: You own 100 shares of Netflix at $400 and are considering selling covered calls.

How to select the optimal strike price:

1. Higher strike price (e.g., $420):
   • Smaller premium (perhaps $4 = $400)
   • Lower probability of having shares called away
   • More potential upside if Netflix rises
2. Lower strike price (e.g., $410):
   • Larger premium (perhaps $8 = $800)
   • Higher probability of having shares called away
   • Less potential upside if Netflix rises

"Strike price selection is about balancing income versus potential opportunity cost. Higher strikes mean less income but more upside potential; lower strikes mean more income but more risk of having shares called away."

Action plan: Based on your outlook for Netflix, select the strike price that aligns with your goals:

• If you're neutral to slightly bullish, choose the $420 strike to allow for more upside
• If you're neutral to slightly bearish, choose the $410 strike to collect more premium
• Consider your tax situation—having shares called away could trigger capital gains taxes

How to Manage Early Assignment Risk

Real-time example: You sold a put option on Tesla with a $230 strike price expiring in 30 days and collected a $5 premium. Tesla is now trading at $225, below your strike price, with 10 days remaining until expiration.

How to manage potential early assignment:

1. Monitor dividend dates: Stocks are more likely to be assigned early before ex-dividend dates
2. Watch for deep in-the-money options: The deeper ITM your option goes, the higher the assignment risk
3. Be prepared with sufficient cash/margin: Ensure you can handle assignment if it occurs
4. Consider rolling the position: You can buy back the current option and sell a new one further out in time

"Early assignment is like an unexpected house guest—it's best to be prepared for it even if it's unlikely. Have a plan ready in case it happens."

Action plan:

• If you're still willing to buy Tesla at $230, simply wait and be prepared for potential assignment
• If you no longer want to buy Tesla at $230, consider buying back the put (perhaps for $8) and either:
  • Accept the $3 loss ($8 - $5), or
  • Roll to a lower strike price or later expiration to collect additional premium

How to Create a Monthly Income Stream

Real-time example: You have a $100,000 portfolio and want to generate consistent monthly income using option selling strategies.

How to implement a monthly income plan:

1. Diversify across multiple positions: Sell options on 5-10 different stocks
2. Stagger expiration dates: Have some options expiring each week of the month
3. Target reasonable returns: Aim for 1-2% monthly (12-24% annually) rather than trying to maximize each trade
4. Manage position sizes: Limit each position to 10-20% of your portfolio

"Consistent option selling is like creating your own dividend stream, except you choose the stocks and the payment amounts. The key is sustainability, not hitting home runs."

Action plan:

• Allocate $20,000 each to five different stocks you're willing to own long-term
• Sell covered calls on stocks you already own
• Sell cash-secured puts on stocks you want to acquire at lower prices
• Target collecting about $1,500-2,000 in monthly premium (1.5-2% of portfolio value)
• Reinvest some premiums to grow your portfolio over time

Practical Tips for Selling Options

1. Only sell puts on stocks you genuinely want to own at the strike price
2. Only sell calls against stocks you're willing to part with at the strike price
3. Be aware of earnings and dividend dates when selling options
4. Consider implied volatility before selling—higher IV means higher premiums but also higher risk
5. Have a management plan for when trades move against you

Remember, selling options is about playing the probabilities over time. As options seller and educator Tastytrade often says, "We want to be net sellers of options because of the natural edge provided by time decay and the overpricing of options due to implied volatility." By consistently selling options with favorable probabilities, you can create a reliable income stream while still participating in market opportunities.