Kareem, thank you for reading and leaving a comment. The way I do it, I only sell puts on stocks I am happy to own at a strike price I am happy to pay. I am not trading options, but using them to either buy stocks that I want at favorable prices, or to generate some cash flow if the options are not assigned.
So I do a lot of research on companies to determine which ones I believe to be decent companies selling for a good price. Let’s take an example of Foot Locker. I wanted to buy FL for around $35 a few months back, so I started selling puts for FL with a $35 strike price. It was selling a little over $40. If the stock price had dropped, then I would have purchased a stock I wanted to own at a price I was happy to pay.
Even if the stock price dropped below $35 I’m still happy, because I know I got a good stock at a good price that I will hold for a long time.
It so happens that FL took off and is now aver $50 / share, so I was not assigned any puts and they expired worthless. I just kept the premium.
I don’t like buying and trading options because then the value of the option is important and you have to be able to predict either the direction or magnitude of price movement.
But when I sell options, very selectively, I essentially cannot lose. If the price goes down, I get the stock plus the premium. If the price goes up, I get the premium.
The only real issue I’ve seen so far is that I do miss some opportunities. I would have made more money just buying FL at $42 rather than selling puts for $35 and missing it all together. But I am ok with that because there is very little downside to my strategy, assuming I choose the stocks and strike prices well.
Calls work the same, just on the sell side. I sell calls on stocks I own that I am happy to sell at the strike price. If the price goes up, I sell the stock for a price I am happy to sell at. If the price doesn’t go up, then I keep the premium and hold on to the stock, selling more calls.
I hope that helps.