I want to give you the easiest lesson you can learn in this business, and it's one that took me years on the floor to fully appreciate.
Only sell puts in stocks you actually want to own.
That's it. That's the whole rule. But there's a second piece underneath it that most people never get to, which is that in the right name, selling the put is a better trade than buying the call, and the math tells you exactly when.
Let me walk you through it with a stock like AVAV, trading around $150.
When you sell a put, you're agreeing to buy the stock at the strike if it gets there. So the first question isn't about premium or probability. It's whether you'd be happy owning the thing at that price.
If the answer is no, you shouldn't be selling the put, full stop. You're not collecting income, you're getting paid to take delivery of something you don't want, and eventually that catches up with you.
But if the answer is yes, now it gets interesting.
Take AVAV around $150. The volatility in this name is expensive. When vol is that rich, the options are priced up, and that cuts both ways depending on whether you're buying them or selling them.
Most people's instinct is to buy the call. You like the stock, you want upside, you buy the call. But when vol is this expensive, you're overpaying for that call.
You're handing the premium to somebody like me, and you need the stock to move enough to cover what you paid before you make a dime.
Now look at the other side. A put down at the 125 strike, a couple months out.
That's about 17% below where the stock is trading. You sell that put, and a put like that can pay you somewhere in the neighborhood of five to seven percent for two to three months of work.
Sit with that number. Five to seven percent in a couple of months, on a stock you already said you'd be happy to own 17% lower than it is right now.
One of two things happens.
Either the stock stays above 125 and you keep the premium free and clear, or it drops down there and you take delivery of a stock you wanted anyway, at a price you already decided was good, with the premium lowering your cost basis even further.
That's the whole trade. There's no version of it where you're stuck holding something you hate.
And this is where the wheel comes in. Once you own the stock, you flip around and start selling calls against it. Collect premium on the way in through the put, collect premium the whole time you hold it through the calls.
In a high-vol name, those premiums are fat, and you're getting paid on both sides of the position.
Compare that to the guy who bought the call. He needs the move, and he needs it before his option decays. You don't need the move at all. You just need to be right that you wanted the stock, which you already were, or you wouldn't have sold the put in the first place.
That's the lesson.
The expensive vol that makes calls a bad deal is the exact same vol that makes selling puts a great one. Same stock, same chart, two completely different trades depending on which side of the premium you're standing on.
Flat tango means we can go anywhere.
Andrew Giovinazzi
P.S. Being successful at options isn’t about mastering different strategies. It’s knowing when to apply the strategy to the right market condition. I learned this on the floor, I’ve taught market makers how to do it too. And now I’m teaching regular folks how to do it in Trader X. If you want to learn more about Trader X, and how to handle this market regardless of what it throws at you, then click here to get started.