I’d like to share a lightbulb moment I had when learning about selling options – it completely changed how I thought about options trading. You see, most beginners approach options like shoppers at a supermarket, always buying what’s on the shelves. But here’s the thing: the real money is often made by thinking like the supermarket owner.
Let me break this down with a simple example from my local green grocer. Every morning, Joe (the owner) gets a fresh delivery of fruit and vegetables. He puts them out on display and sells them to customers throughout the day. Here’s the interesting part – he doesn’t have to pay his supplier until later. In other words, he sells the goods (to customers) before he actually pays for them.
And this is how retail commonly works – you receive the merchandise first, and don’t have to pay the invoice for it up to 90 days in the future. During that time you can sell the goods to your customers, and then pocket the difference between what you sold the goods for, and what you have to pay for them 90 days later.
Buy Low, Sell High
You’ve probably heard the classic investing advice “buy low, sell high” – it’s practically tattooed on every trader’s brain! But here’s what’s fascinating about selling options: we’re doing the exact same thing, just in reverse order.
Instead of buying low first and then selling high later, we’re selling high first and then buying low later.
Think about our supermarket owner again. They don’t buy their inventory first and then hope to sell it for a higher price. Instead, they sell their goods to customers at retail prices first, then settle up with their suppliers later at wholesale prices. That’s the beauty of selling options. We collect the high premium upfront (like the supermarket collecting the retail price), and then if we need to buy the option back later, we do it at a lower price (like paying the wholesale supplier). The profit is exactly the same as “buy low, sell high” – we’re just flipping the order of operations. And here’s the best part: sometimes, just like those overripe bananas at the end of the day, options can expire completely worthless, meaning we don’t have to pay anything at all to buy them back!
We can apply exactly the same analogy to selling covered calls. Instead of buying options first and hoping to sell them later at a higher price when volatility or price action goes up, we sell them first and then buy them back later – hopefully at a lower price (or sometimes, they expire worthless, meaning we don’t have to buy them back at all!).
…Sell the goods to your customers and pocket the difference between what you sold the goods for, and what you have to pay for them 90 days later.
It evaded me for quite a while that we should be so interested in the “option expiring worthless”. But once I started to think like a retailer, the penny finally dropped- you want the value of the option to go down so that you have to pay less to buy it back.
I remember when this concept finally clicked for me. I was actually standing in my local supermarket, when this analogy came to me – options are just like perishable goods! Their value decays over time, and as sellers, we can use this to our advantage.
Here’s why this mindset shift is so powerful: Just like a supermarket makes its profit from the difference between what they sell their goods for and what they pay their suppliers, options sellers profit from the difference between what they collect upfront and what they might need to pay later to close the position.
One quick tip I learned: Just as supermarkets are careful not to overstock perishable items, you want to be careful about how many options you sell. Start small, get comfortable with the process, and gradually scale up as you gain experience. Leave some space to grow, in case the market goes down and you have the opportunity to get a better price.
Remember, successful options sellers aren’t just throwing stuff on the shelves and hoping for the best – they’re strategic about what they sell, when they sell it, and how they manage their inventory. It’s all about being the house, not the gambler!
Check out why you should consider selling In The Money calls by reading this blog post.
