If you're selling premium, you're selling insurance to somebody who is surely much bigger than you are. Sure you could sell Warren Buffett car insurance, but his capital is cheaper and the your opportunity cost is much greater. You can do much more with a small stake than sell premium. For some reason, many small traders think they run Hedge Fund Jr. and pursue strategies suitable only for large traders.
Sell fat premium on 3-5 month ATM straddles in a market in which you expect to be range bound. Make sure the premium you sell is wider than the range you expect. Then buy cheap OTM puts and calls under 1 month, in the same quantity sold, as a disaster insurance. Monitor the whole package real-time and delta hedge it. Unwind when you are up or down 30%, including hedging costs.
and people "on the floor" have deep pockets and much lower costs. For the average Joe Sixpack, this is not a good idea, unless they have an Edge.
Geez is that alot of work for a 30% gain. Monitor it real time and delta hedge? No problem! No, this kind of strategy would eat up any kind of small account in commissions and slippage. I was reading Cramer's Street Addict recently - he got rich betting on huge gains, like turning an $80000 options bet into $800,000 - hard to get there one iron condor at a time, while you're delta hedging and all that crap.
Check out this CTA. Their main strategy is selling strangles on the S&P: http://investwithace.com/strategies/sipc.php http://investwithace.com/performance/sipc.php Be careful with your money when you're selling options.
Well, that's a great strategy for people who can figure out which options are going to be the 10 baggers (as opposed to the vastly more common 0 baggers). Me, I just try to get a steady 5% per month on iron condors, double diagonals, and circus calendars. Yes, I'll occasionally buy a straight call or put when a stock is clearly bouncing off well established support or resistance but for the most part I've found that to be a loser's game.
Since we are pulling up numbers... I sell options, and I am a contrarian. I use the two to make money since right now on my radar there are only 2 contrarian stocks. So I did the numbers on option writing, and the reality is that the example you pulled up is an example of how not to do it. I looked at 26 different option trading performance sheets as I wanted to see how bad or good things can get. The risk to reward is about 7 to 1, but the good guys do about 3.5 to 1. This means if you earn about 5% per month writing options your draw down in the worst case is about 35%. The guys who know how to do this have about a 17.5% drawdown. I am not in the good guys camp, I am more in the 7 to 1 camp. In this strategy it does not matter how you hedge, or what tricks you do you will get whallopped at one point. You just might not get whallopped at the same time as other option writers. The fact that the guy lost 50% plus means he is at the bottom of the option writing scale. For him to blow 50% he needs to earn around 7% per month, thus including losses this pushes him to around 9% per month.