The gap robber strikes again! Monday greeted traders with a nasty down-gap, particularly in the land of tech. Tuesday is delivering an up-gap. Said gap robber is an annoying man vexing the life of the directional trader. Want to buy above today’s high? Too bad, we’re gapping 50 cents above it. Want to short below today’s low? Tough! We’re opening 30 cents below it.

Welcome to the summer chop. Last week I talked about how to protect your digits when the knives are flying. Today we’ll make a case for why selling premium is so darn attractive during the summer doldrums.

First, let’s be clear. When traders talk of “selling premium,” they’re referring to selling options – in any combination: covered calls, naked puts, credit spreads, condors, and the like.

Selling options = selling premium = cash flow = positive theta

Another characteristic of these trades is their high probability of profit. This increases the range a stock can trade in while still yielding profits. Choppy range? No sweat – selling premium will deliver.

Pick a Side

Perhaps the simplest way to venture into the premium selling arena is using credit spreads on Indexes. This sidesteps the stock picking dilemma and focuses instead on playing the broad market trend. And that’s a good thing because when the market enters correction mode where prices are chopping, and we’re beneath the 50-day moving averages on most indexes, correlation runs to one and stocks tend to move increasingly together.

Let’s illustrate three possible ways to sell premium on the Russell 2000 Index.

Bull

Suppose you think buyers will ultimately prevail. Chop, Shmop, you reason. RUT is going higher, so let’s sell premium with a bullish tilt.

You could sell the July $1400/$1390 bull put for $1.10.

The spread provides $1.32 in theta per day (a number which will rise). And the potential for a 12.4% return if RUT sits above $1400 at expiration. As far as probability goes, the $1400 put carries a 0.14 delta, so your odds of winning are 86%.

Bear

Perhaps last week’s breach of the 50-day moving average has your knickers in a twist. Or maybe you already have a boatload of bullish positions and are looking to diversify your holdings. In either case, let’s say you’d prefer a bearish biased premium play.

You could sell the July $1650/$1660 bear call for $1.10.

The spread provides $2.29 in theta per day, and the potential for a 12.4% return if RUT sits below $1650 at expiration. The probability of profit is 89%.

Neutral

Suppose you can’t pick a side. You’re stuck on the fence reasoning dips will be bought, but rallies sold. There’s no need to force the issue. Take a chill pill and sell condors. Your directionally agnostic, pick up twice the theta and position yourself to get bullish into weakness and bearish into strength. It’s a perfect position if you think the markets carve out a summer range.

Maybe you sell the July $1400/$1390 bull put and the $1650/$1660 bear call for a total credit of $2.20. The potential return is 28%, and the probability of profit is 75%.

And, of course, you can switch up the strikes to widen the profit range based on preference. The objective isn’t to recommend a particular trade. It’s to illustrate how a trader might think about selling premium.

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