Question regarding selling puts for premium

[NeedMoreTheta]

While that is true, too much size is detrimental regardless of the vehicle you are trading. I have known people that went "all in" on penny stocks and were wiped out. If you are risking more than 10% of of your account on any one trade you are asking for trouble and again that doesn't matter what you are trading. I would rather risk 2% of my account on many trades than 100% on an all or nothing trade...that would be pure stupidity.

However saying there is "no safe way to trade options" is just being short sighted. In fact one thing about trading options is the ability to limit downside to only what you feel comfortable with. With straight equities what happens if you are long and something like the CEO getting arrested happens (ala Enron)? Now what happens if you were "all in"?

Since you like equities, let me give you an example of a great way to use options. Imagine if you own XYZ stock at $100 and you put in a stop loss order at $95. Now overnight news breaks that the company's warehouse where they were storing the new version of widgets they were supposed to release next week went up in flames along with all of their inventory. The next day their stock gaps down to $70. You are going to take a $30/share hit. If you had bought $95 puts instead of the stop loss order your max loss would only be $5/share + cost of the puts. Sounds pretty safe to me.

Here is another one, the FDA is set to announce if they are going to approve Pfizer's new miracle drug next week, as an equity trader you don't know if you should go long or go short but you know the decision is going to cause a big move one way or another but you have to wait to know which way to jump and then if not fast enough you might miss the move. An options trader would just put on a long straddle risking ONLY the cost of the option and make money either way.

In either of these cases (and there are LOTS more) where is my big risk that is going to blow out my account?

I agree with Maverickz. In the end it really come down to risk management. I came from a different spectrum, however, I like to be the writer of the stock options.

In my opinion, trading options is more advantageous than trading straight stock. When I started out with trading options I started out with covered call. Yes the risk and reward ratio may not seem very apetizing, but again it really depends on the risk management.

Obviously if you have a small account you won't be trading stocks that are selling for $100/share. I would start out with buying stocks that are trading in the $5-$15 and sell the closest OTM Call options. Normally, I would pick the one that has relatively high IV compared to the last 52 weeks, so I would be able to collect as much premium as possible. This would equate somewhere around 5% ROI per month (return of $50 per $1000 invested every month = 60% ROI/year). And perhaps I would never hit a homerun, but I know every month I will be collecting a fix realized 'income' just for owning the stock (kinda like dividend I suppose). yes there is a risk of 30% draw down or whatever amount, but how is this differ than trading straight up stock....yes you can make 65% return, but what are the probability of this happening? the probability is probably as small as hitting the 30% draw down....Another advantage is obviously you can diversify more while collecting this fix 'income' every month. I don't do just one, I would add multiple different strategies, each only risking 2-5% of my portfolio (my risk management). I vary the strategy from short Strangle, vertical, naked, butterfly, straddle, calendar, and so on depending on how the stock is behaving. Also another aspect that I see traders might miss is ROTI = return over time per $ invested. if you get 60% return in the period of 12 months of $1000 investment that's really the same as 5% ROTI....all of us can do this easily with covered call....