The 3 Lessons Every Option Seller Learn TOO LATE

I have been selling options since 2017, where I paid several thousands dollars to learn the skill set of using options from mentors.

As with any skill sets, the more you practice , you begin to recognise patterns. These are golden lessons that helps you to prevent making the same mistakes over again. The less mistakes you make, it is probably not surprising that you will eventually become more successful.

In this blog post, I  want to share three lesson every option seller learn too late.

Lesson #1 - Don't Set Stop Loss GTC Orders

Now - let's be clear before I move on.

I always have my own exit rules for my option trades. But I do not use a GTC stop loss order for the broker to automatically cut my losses.

Here's why.

Unless stock prices, option prices can be very volatile. For those who are more experienced, you will realised then during market opening - your option positions will fluctuate like crazy - despite the share price not moving that much at all. This is due to lack of liquidity during market opening, resulting in a huge swing in option prices.

If you were to set a stop loss order, there is a chance that you might be whipsawed and unnecessarily close your option positions at a loss.

Trust me, I have had experienced that before. This is why I rather eyeball the option price myself and cut the losses myself, rather that setting up a stop loss order. 

Lesson #2 - Don't Trade Illiquid Options

This is a real problem that most people are having.

Imagine seeing your option positions making $1250 of profit. You want to close the option to take the profit. But somehow, the order just does not close. Nobody is buying over your position.

It is kinda like owning a house that is worth $1,000,000 but nobody actually wants to buy your house. You are then forced to sell at a lower price until somebody is willing to buy it.

Sounds familiar?

This is due to illiquidity. 

You need to bear in mind to only sell options that (1) have a narrow bid-ask spread of less than $1.00 and (2) the stock has sufficient trading volume > 3M.

Here's what I mean by bid-ask spread.

When you look at the various option chain, you can see the bid and ask price of each strike price. Let's take the 192.5 strike price as an example.

As you can see, the bid-ask spread here is between 8.60 to 9.00. This was a bid-ask spread of $0.40, which is considered very healthy, and they shouldn't be a problem closing the trade.

Now, let's see a negative example.

You can see that the above - all the strike prices had a bid-ask spread of more than $1.00. This means that that option chain actually has very little volume (i.e. liquidity). And typically these options  are the options you will face difficulties closing the trade. These are the type of options which I will avoid selling.

Lesson #3 - Don't Wait For 100% Profit

When selling options, most people make the mistake of waiting for 100% profits. If you are a student of Options Cash Flow Mastery, you probably know that I close my option trades at 50% profit.

You see, whenever you sell an option, you consume option buying power - and this limits the number of trades that you can make. When you close your option positions, these option buying power is free up and you can then open more positions (and making more money).

For most of my option trades, I typically use 40 to 60 days to expiry. And usually, I can reach a 50% profit within two weeks (i.e. 14 days). So it is far more efficient for my to close the trade at a 50% profit early and reopen a new trade, rather than to wait till expiry to earn 100% of the option premium.

Furthermore, the longer you wait, there will also be a chance that the stock price movement moves against you and turning your profit into a loss. Trust me, this has happened before.

In short, I will always prefer to close my trades at 50% profit, simply because it is a more efficient way to do so.