What is the most conservative option strategy?

Answer 1

Selling naked puts against covered calls is about as conservative as options get if you're a short-term investor. If you're a long-term investor and you specialize in one industry, selling naked puts into cyclical downturns is very safe. To do it, you need to really know the industry you're in. I like building materials a LOT. These stocks get soft in the winter because no one in the North is building anything--they can't because it's too cold. If you buy stock in October by selling naked puts, and sell it in April by selling covered calls, not only do you make money on the increase in value of the stock but you got paid to do it twice--once when you bought, once when you sold. Another good conservative option strategy is selling slightly out of the money puts on stocks you like. To see how it works, let's sell a 30-day put on Simpson Manufacturing Co at $27. This is a really good company that doesn't move around much--their 52-week high is $34.36 while their 52-week low is $20.08. Today they closed at $27.87. We'll sell this put for $3 per share. If on or before October 8 the price of Simpson stock drops to $26.95 or less, this option will get exercised. Let's pretend it hits $26. I will pay $27 per share for this $26 stock--BUT! Since the put buyer paid me three bucks a share, I subtract $3 from $27 and wind up paying $2400 for 100 shares (options are generally done in 100-share increments) of a very good, solid company. The only problem here is you need enough money to buy the stock in your option account. A little bit more risk comes from selling in-the-money puts. Here you try to sell the put at a lower strike price than you think the stock will go. If Acme's selling for $10 now and you think it'll stay above $9.50 for the duration, try selling a put at $9. If it doesn't drop below $8.95, the option won't exercise and you keep the premium. This is risky because if the stock DOES drop below $8.95, you need $900 right now.