In the video titled “How I Made 155.73% ROI In 9 Days Selling In-The-Money Put Options” by Options with Davis, the speaker shares their experience and insights on selling in-the-money put options. They explain how selling in-the-money put options allows for both extrinsic and intrinsic value, and discuss the reasons for not choosing out-of-the-money or at-the-money put options. The speaker provides timestamps for different sections of the video and encourages viewers to leave comments or ask questions. They emphasize the importance of considering the worst-case scenario before entering a trade or investment. The trade mentioned in the video involves the qqq’s on May 23rd, where the speaker sold an in-the-money put option and made a profit of $155.73 in just 9 days by leveraging bullish indications such as a pin bar pattern and divergence in the market.
Introduction
In this video, I will share with you a trade where I sold an in-the-money put option and made a 155.73% ROI in just 9 days. By selling in-the-money put options, you have the opportunity to benefit from both extrinsic value and intrinsic value. If you’re looking to quickly make profits by selling options, then selling in-the-money put options is definitely worth considering. Throughout this video, I will explain my mindset during the trade, the reasons why I chose not to sell out-of-the-money or at-the-money put options, and provide tips for generating a higher return in a shorter time.
Selling In-The-Money Put Options
Extrinsic Value and Intrinsic Value
When selling put options, it’s important to understand the concept of both extrinsic value and intrinsic value. Extrinsic value is essentially the time value of the option, which decays as time goes on. It represents the potential earnings from the option, as time decay eats away at its value. On the other hand, intrinsic value is the difference between the current stock price and the strike price of the option. It does not decay over time and remains constant until the option expires.
When selling in-the-money put options, you have the opportunity to capture a mix of extrinsic and intrinsic value. This is beneficial because if the market moves in the desired direction, you can profit from both the intrinsic value and any remaining extrinsic value. By selling options with a higher delta, such as a 65 delta put option, you can have a greater mix of intrinsic value. This allows you to take advantage of a potential market rally and maximize your profits.
Reasons for Not Selling Out-of-the-Money Put Options
Many traders often sell out-of-the-money put options because they offer a higher premium or credit. While this may seem tempting, there are reasons why I chose not to sell out-of-the-money put options in this particular trade. When you sell out-of-the-money put options, the majority of the premium is made up of extrinsic value. This means that the option’s value is primarily derived from time decay.
If the market were to move in your favor and the option were to expire worthless, your profit would mainly come from the decay of extrinsic value. However, if there was a significant move against your position, the extrinsic value may not provide enough protection and you could face substantial losses. This is because out-of-the-money put options have a lower probability of being exercised, and their value is highly dependent on time decay.
Reasons for Not Selling At-The-Money Put Options
Similarly, I chose not to sell at-the-money put options in this trade. At-the-money put options have a strike price that is equal to the current stock price. While this may seem like a balanced choice, at-the-money options have a higher amount of extrinsic value compared to intrinsic value. This increases their sensitivity to time decay, making them riskier options to sell.
By selling at-the-money put options, you are primarily relying on time decay for your profits. While this strategy can work in certain market conditions, it may not be as lucrative or efficient as selling in-the-money put options. By choosing a mix of intrinsic and extrinsic value, you can potentially generate higher returns in a shorter time frame if the market moves favorably.
Speaker’s Mindset during the Trade
During this trade, my mindset was focused on the bullish indications I observed in the market. Despite the recent market sell-off and negative news, I noticed a potential reversal pattern forming. There was a sequence of lower lows followed by a higher low, indicating a possible shift in market sentiment. Additionally, I identified a bullish pin bar pattern, which suggested that the bulls had a higher probability of pushing the market higher.
To further support my bullish thesis, I noticed a divergence between the market’s lower lows and the higher lows on the stochastic oscillator. Divergence is a bullish indication that strengthens the argument for a potential market rally. With these combined indicators, I felt confident that the market had a good chance of rebounding in the near future.
Tips for Generating a Higher Return in a Shorter Time
If you want to generate a higher return in a shorter time, consider the following tips:
-
Analyze Market Indications: Look for bullish indications such as reversal patterns, divergences, and key support levels. These signals can provide valuable insights into potential market movements.
-
Choose In-The-Money Options: By selling in-the-money put options, you can capture both intrinsic and extrinsic value. This allows you to benefit from a potential market rally while still making use of time decay.
-
Manage Risk: Before entering a trade, always consider the worst-case scenario and ensure you have the financial means to fulfill your obligations in case of exercise. Implement risk management strategies, such as setting stop-loss orders or position size limits, to protect against potential losses.
-
Stay Informed: Continuously educate yourself about options trading strategies and stay up-to-date with market news and trends. This knowledge will help you make informed decisions and adapt your trading strategies accordingly.
By implementing these tips, you can increase your chances of generating a higher return in a shorter time frame and enhance your options trading success.
Trade Overview
Timestamps for Different Sections of the Video
- Start: 00:00
- The Trade: 02:00
- Extrinsic Value vs. Intrinsic Value: 03:49
- Planning for the Worst-Case Scenario: 12:28
- Takeaways: 14:29
Profit and ROI Calculation
In this trade, I sold an in-the-money put option with a strike price of $300 when the market price was $290. The option had 53 days until expiration, and I sold it for a premium of $20.01. With this premium, I received a total of $2,001.
After 9 days, on June 1st, I closed the trade. I experienced a profit of $155.73, which represents a remarkable 155.73% return on investment (ROI) based on the premium received.
Market Analysis
Bullish Indications
Despite the ongoing market sell-off, there were several bullish indications that caught my attention. The market had been making lower lows, but it formed a higher low, suggesting a potential shift in market sentiment. Additionally, a resistance level was established at a previous low, and the price failed to break below it. This event led to the formation of a bullish pin bar pattern, indicating that the bulls were gaining strength and had a higher chance of pushing the market up.
Pin Bar Pattern
A pin bar pattern is a technical analysis candlestick pattern that can signal a potential reversal in the market. In this case, the bullish pin bar suggested that the market had a higher probability of going up rather than down. This pattern, coupled with the resistance level, further reinforced my bullish outlook on the trade.
Divergence
Divergence occurs when an indicator, such as the stochastic oscillator, shows a different trend than the price action. In this trade, the market was making lower lows, but the stochastic oscillator was forming higher lows. This bullish divergence added another layer of confidence to my bullish thesis, indicating that the market had a higher chance of rallying.
Conclusion
Selling in-the-money put options can be a lucrative strategy for generating profits in options trading. By capturing a mix of intrinsic and extrinsic value, you can take advantage of potential market rallies and maximize your returns. It’s important to consider the specific market conditions, analyze bullish indications, and manage risk effectively. By understanding the concepts of extrinsic and intrinsic value, you can make informed trading decisions and potentially achieve impressive ROIs, just like the trade discussed in this video. Remember to always stay informed, continuously learn, and adapt your strategies to market trends.