Stock Market Analysis: Best Markets for Options Selling

Just like weather, the markets have seasons too. A general stock market analysis can suggest whether it is a good market to sell options or whether it would be wise to stand aside. By general analysis we mean that it should be possible to put a market into one of five conditions: Strongly up-trending, weakly up-trending, flat, weakly-down trending and strongly down-trending. A look at a six-month chart of your market should enable you to do this by inspection.

Let’s look at market trends in light of our two workhorse strategies, covered calls and cash-secured puts. We’ll look first at covered calls. The best markets to enter into covered calls are flat to weakly up-trending markets. In the flat market you will collect your premium, convert it to income at expiration and the price of the underlying will remain about the same. Great! Sell next month’s calls and repeat the process. In a weakly up-trending market, you may get called out. That’s good too, you keep the premium and make a gain on the stock as well. You will probably get called out in a strongly up-trending market as well, but you may have seller’s remorse if the profit you could have made without selling the covered call is greater than what you make upon being called out. But it’s a profit nonetheless! Down-trending, and especially strongly down-trending markets are not the friend of covered-call players. In down-trending markets, the safest covered call will be collered by a protective put whenever possible.

Turning now to the cash-secured put, the best markets for these are flat, weakly up-trending and strongly up-trending. In each of these three markets you will let your put expire and convert your premium to extra income. Down-trending markets result in poorer conditions to sell puts unless your reason to sell puts is to acquire stock at a cheaper price than when you sold the put. If you purpose in put selling is to generate extra income, then you will need to have an exit strategy in place in case the market moves against you.




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