Our resident options experts, James Cordier and Michael Gross, answer readers’ questions.

Q: Many of the option premiums I’ve seen on stocks are not large enough, in my opinion, to bother with. How can I go about getting larger premiums?

A: Big premiums are out there for the taking. You just have to find them. A couple of the obvious ways are to look to commodity options instead of stocks and to select markets with higher volatility. However, there are more specific ways to get bigger premiums. We have listed a few of our favourites below:

1. Sell naked: Spreading has its merits. But for pure premium collection, there is no way to get bigger premiums and realise them faster than selling naked. While the word conjures up images of being ‘exposed’ and thus discourages many investors from exploring it, naked option selling can be done responsibly and effectively. It’s the cornerstone of our philosophy and our portfolio strategy. While risk must sometimes be managed a bit more closely than ‘covered’ risk, you are doing yourself and your portfolio a disservice if you do not consider selling naked in at least some situations. It’s the power play, the strong side sweep, the right hook in an option seller’s arsenal...

Excerpted from an article originally published in the Jan/Feb 2012 issue of YourTradingEdge magazine. All rights reserved. © Copyright 2012, Your Media Edge Pty Ltd.
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