Congratulations on completing the first five lessons for getting started with selling safe option strategies.  Now you can consider yourself a more advanced investor.  Few people know how to sell options.  Hopefully, trading options should be almost second nature.  However, if it’s not then I think you should take a few more months and complete a few more trades.  When you feel comfortable with your options trading then you can start this next lesson and learn how to increase earnings using safe option strategies.

In this lesson, I am going to discuss what you can do to increase your income and take the trading to a higher level.  This will include managing vertical put credit spreads, increasing the number of contracts, and taking a bit more risk to earn a higher premium.  Just a reminder that I do not trade naked calls or puts so in all cases you should have the cash to cover your trades for puts and own the stock for calls.

When managing vertical credit spreads you always have two trades that are referred to as arms.  For a credit spread the inner arm you sell the contract and for the outer arm, you purchase the contract.  Let us again do an example to clarify things.  So, if you want to do a vertical put credit spread for INTC (Intel) and it is currently selling for $56.  You can sell an option with a strike price of $52.50 that expires in 40 days and at the same time purchase a contract at $45 expiring the same day.  You would have made some premium on this trade.   Below is what it looks like in a trade journal.

Now when you get close to expiration you have a few choices.  If the spread is “out of the money”, then you can let it expire.  If you are in or near the money you can either close it or roll it.  I typically close it if I can do it and still have at least a 70% gain.  If not, then I roll it out to a future expiration day and try to get a better premium.  In this case, you must close both trades and open two trades out in the future.  Here is what it would look like.  Just like rolling cash-secured puts and covered calls I typically want to get a better strike price and earn some additional premium.

I made some additional premium on this trade and was able to push it out into the future.  I did increase the strike price on the inner arm from $52.5 to $53.5.  I also wanted to mention that you do not have to close the further out option.  This is especially true if it has no value.  I typically look at any expiring positions a couple of days before expiration.  In the INTC roll above if the value for the $45 contract had no value I could have just left it in place and it would have expired.

Now that we have the management of a vertical put credit spread out of the way let us look at how you can increase your earnings with safe option strategies.  Now that I have been trading for a while, I like to do fewer trades and make more per trade.  I typically try to get close to $200 on each trade.

Up to now, we have been discussing single contracts.  The easiest way to increase the premium per trade is to do more than one contract.  Even after doing this, I typically do not go over two contracts.  A lot of times I can find a surprisingly good premium on a contract, and it makes sense to double it.  This is especially true if the price of the stock is below $60 for puts.

For calls, I try to own more shares in increments of 100 so that I can do multiple contracts.  Most of the trades I do now are for 2 contracts and are closer to $200 of premium per trade.  With more contracts I can do fewer trades and in so doing it is easier to manage the positions.

Another way to improve my premium for each trade is to take a bit more risk on some trades.  I still stick to the 80% probability rule but in some trades, I am willing to take a higher probability that the contract will expire in the money.  This is especially true of vertical put credit spreads.  Since I have the outside arm, I am minimizing my risk automatically.  Look at the last lesson for more on this. (Lesson 5)

I feel that with puts I am taking less risk with selling options.  This is due to two reasons.  First I only trade in quality stocks that have little chance of going bankrupt.  Meaning they will not decrease by huge amounts.  For instance, little chance that XOM will go to 0.  The second reason that they are less risky is that I only sell put options on securities that I want to own.

I had a number of puts assigned to me back in October of 2022,  Most of these assignments were due to hitting a low point in the market.  I called Schwab and found out that a lot of margin calls were occurring and investors were having to put shares to people ta gain some quick cash.  Due to this happening I decided to lower the Delta I use for selling puts to a -15 Delta or an 85% probability.

The lower Delta has worked well for me.  Since then I have had only one additional company assigned to me.  So now I use a 20 Delta for Calls and a 15 Delta for puts.  I have also thought about changing the Delta I user by security type.  For instance a higher Delta for ETFs and a lower Delta for stocks.  As of this writing I have not made a decision.

Now with the above information try a few trades where you purchase more than one contract.  I suggest going with two contracts.  Also, if you are selling a put and like the underlying stock then take a bit more risk with selling the contract.  What is important is to get used to doing more than one contract and to not take on too much risk.   I typically will not go beyond a 70% probability.  Finally, set a goal of what you would like to earn.  When I first started, I set a goal of $1k for my first month.  From what you now know you should be able to do this with less than 10 trades.

Thanks for tuning in for how to increase earnings using safe option strategies.  If you are getting started with options trading, please leave a comment, and let me know how you are doing?

Blessings,

Jim Adams