How to Get Started With Selling Options Even If You Are Broke, Young And Jobless

When I embarked on my journey into the US stock market as a novice investor, my initial interest was not into the traditional realm of buying stocks; instead, I found my first trade to be in the enticing world of selling options.

I still remember one of my first sell put trade was a 55 put option on Tractor Supply. 

"Ching! $85 was credited to my brokerage account"

What is interesting about selling options is the the immediate impact on my brokerage account—witnessing a swift $85 increase after just one trade ignited my interest. This aspect of options trading, the potential to extract consistent cash flow from the stock market, captivated me.

The problem with selling options

However, a realization soon dawned upon me—a challenge that many encounter in options trading.

When you sell a put option at a strike price of 55, it means that you are promising to buy $5,500 worth of shares.

To understand options, you need to know what is Options Buying Power.

In the context of the example provided, where a 55 Put option is sold:

If the strike price of the put option is $55, and the broker requires a margin of 20% for selling options, you would need to set aside 20% of the strike price as margin.

The potential obligation to buy 100 shares at $55 each would require $5,500 ($55 * 100). With a 20% margin requirement, the option buying power consumed would be $1,100 ($5,500 * 20%).

This means that if the account's liquidated balance falls below this margin requirement, you could get a margin call from the broker. <Yes, that means bad news as you will be forced to liquidate your positions as a loss>

With the above, it means that to scale up your portfolio (and increase the option premium you  are collecting), you need to have more capital.

Essentially, to amass more cash flow, I needed to sell more options, and to do that, I required more capital (i.e., option buying power).

As a 22-year-old with limited financial resources back then, this presented a formidable obstacle.

Enter the solution: Vertical Spreads.

You see, most people shy away from the idea of selling options

Why?

Because of the sheer thought of triggering a margin call.

Not many people - who are just starting out, is willing to commit that sort of risk - especially when they are just learning about options.

The solution? Selling vertical spreads.

How Do Vertical Spreads Work

Let's talk about Bull Put Spreads.

Selling a Bull Put Spread involves selling a put options, and at the same time, buying a put option as well.

Here's an example.

Let me dissect the above trades which was my very first Bull Put Spread.

In this trade,

• Sold a 55 Put and collected $95
• Buy a 50 Put and paid $10

Net net, I collected $85 for this trade.

What's The Difference If I Just Sold A Put Option?

Well, here's the breakdown.

*With the initial $85 of option premium you have collected, the net risk is only $415.

You see, whenever you sell a put option - the broker only has one thing on his mind.

"If the sell put option is exercised, can my client commit to buying the 100 shares?"

However, when selling a BPS - he is not as concerned. Because he knows that you can a buy put position.

So even if the sell put option is exercised and you are forced to buy 100 shares at $55 - your buy put allows you to exercise the right to sell away those 100 shares at $50. This, therefore, limits your risk at only $500.

The Power of Vertical Spreads

You can see in the above example that, by selling a vertical spread - you only require $415 instead of a huge amount of $5,500.

This also means that it is much easier to scale up your portfolio as the Option Buying Power required is much lesser now.

That is exactly how I got started with selling even if I was young, broke and jobless.

But here's the thing - to sell options profitably, you need a sound strategy.  I distilled the strategies behind option selling within the Options Cheatsheet (video training included).