Ready to dive into the exciting world of options selling on ETRADE? Whether you're looking to generate income, hedge existing positions, or potentially acquire stocks at a discount, selling options can be a powerful tool in your investment arsenal. But before you jump in, it's crucial to understand the process and, more importantly, the risks involved. This comprehensive guide will walk you through everything you need to know, step-by-step, to confidently sell options on ETRADE.
Your Journey Begins: Selling Options on E*TRADE
Selling options is a more advanced strategy than simply buying them, as it involves taking on obligations rather than just rights. However, with proper understanding and risk management, it can be a highly rewarding approach. Let's get started!
Step 1: Are You Ready for Options Selling? The Crucial Self-Assessment!
Before you even think about logging into your E*TRADE account, ask yourself: Am I truly prepared for options selling? This isn't just about having money; it's about having the right mindset, knowledge, and risk tolerance.
Sub-heading: Understanding the Fundamentals
What are options? Options are contracts that give the buyer the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset (like a stock) at a specific price (the strike price) on or before a certain date (the expiration date).
What does it mean to "sell" an option? When you sell (or "write") an option, you are taking on the obligation.
Selling a Call Option: You are obligated to sell 100 shares of the underlying stock at the strike price if the buyer exercises the option. This is typically done when you believe the stock price will remain flat or decline.
Selling a Put Option: You are obligated to buy 100 shares of the underlying stock at the strike price if the buyer exercises the option. This is typically done when you believe the stock price will remain flat or rise.
Why sell options?
Income Generation: You collect a premium (the price of the option) upfront from the buyer. This premium is yours to keep if the option expires worthless.
Hedging: You can use options selling to offset potential losses in your existing stock portfolio.
Acquiring Stock at a Discount: Selling puts can allow you to buy shares of a company you want to own at a price lower than the current market price, especially if the stock falls.
What are the risks?
Unlimited Risk (Naked Calls): If you sell a call option without owning the underlying stock ("naked call"), your potential loss is theoretically unlimited if the stock price skyrockets.
Significant Loss (Naked Puts): While not unlimited, selling a naked put can lead to significant losses if the underlying stock price plummets, as you'd be obligated to buy shares at a much higher price than their market value.
Assignment Risk: The buyer of your option can choose to exercise their right at any time, even before expiration. This means you might be forced to buy or sell shares sooner than expected.
Time Decay: While generally beneficial for option sellers (as the option loses value over time), sudden market moves can negate this advantage.
Complexity: Options trading, especially selling, involves more intricate concepts like the "Greeks" (Delta, Gamma, Theta, Vega) which impact option pricing and risk.
If you're new to options, consider starting with less risky strategies like covered calls (selling calls on stock you already own) or cash-secured puts (selling puts with enough cash in your account to buy the shares if assigned).
Step 2: Gaining E*TRADE Options Approval - Your Gateway to Trading
E*TRADE, like all reputable brokers, requires you to apply and be approved for options trading. They have different approval levels based on the complexity and risk of the strategies you want to employ. Selling options, especially "naked" options, typically requires a higher approval level.
Sub-heading: The Application Process
Log In to Your E*TRADE Account: Access your existing E*TRADE brokerage account. If you don't have one, you'll need to open a standard brokerage account first.
Navigate to Options Trading Application: Look for sections like "Trade," "Accounts," or "Settings" to find the options trading application. It might be under "Upgrade Account" or "Trading Privileges."
Complete the Application Form: You'll be asked a series of questions regarding:
Your Investment Objectives: Are you looking for income, growth, speculation, or hedging?
Your Trading Experience: How long have you traded stocks, and do you have prior options experience?
Your Financial Situation: This includes your annual income, net worth, and liquid net worth. This is crucial for E*TRADE to assess your ability to bear potential losses.
Your Understanding of Options Risk: You'll likely need to acknowledge that you've read and understood the "Characteristics and Risks of Standardized Options" disclosure document.
Review and Submit: Carefully review all your answers before submitting. Providing accurate and thorough information can help expedite the approval process.
Sub-heading: Understanding Options Approval Levels
E*TRADE generally categorizes options trading into levels. While the exact terminology might vary slightly, here's a general idea:
Level 1 (Basic): Typically includes strategies like buying calls and puts, and sometimes covered calls and cash-secured puts. These are generally considered less risky.
Level 2 (Intermediate): May include more complex defined-risk strategies like spreads (e.g., bull call spreads, bear put spreads).
Level 3 & 4 (Advanced): These levels allow for the selling of "naked" options (uncovered calls and puts), which carry significant or unlimited risk. You'll need substantial financial resources and demonstrable experience to qualify for these levels.
Be honest in your application. Trying to inflate your experience or financial standing can lead to issues later. It's better to start at a lower level and gain experience before requesting an upgrade.
Step 3: Research and Strategy Formulation - The Brainwork Before the Trade
Once approved, resist the urge to immediately jump into a trade. A well-thought-out strategy is the backbone of successful options selling.
Sub-heading: Identifying Opportunities
Analyze Underlying Assets:
Fundamental Analysis: Research the companies whose options you're considering. Look at their financial health, industry trends, news, and future outlook. Are they stable? Volatile? Do you have a strong opinion on their future price movement?
Technical Analysis: Use charts and indicators to identify support and resistance levels, trends, and potential entry/exit points for the underlying stock.
Market Outlook:
For Selling Calls: You typically want to sell calls on stocks you expect to be flat or slightly bearish. If you sell a covered call, you're fine if the stock goes up to your strike, but beyond that, you're capping your upside.
For Selling Puts: You typically want to sell puts on stocks you expect to be flat or slightly bullish. You're essentially betting that the stock won't fall below your chosen strike price.
Volatility Assessment: Options prices are significantly influenced by volatility.
High Implied Volatility: Generally benefits options sellers as it means higher premiums collected. However, it also signifies higher risk of unexpected price swings.
Low Implied Volatility: Means lower premiums, but also potentially lower risk for option sellers.
Consider Options Chains: E*TRADE's platform provides detailed options chains.
Expiration Dates: Choose a date that aligns with your market outlook. Shorter-term options decay faster, which can be advantageous for sellers.
Strike Prices: Select a strike price that reflects your price target for the underlying asset. For selling calls, you want a strike above the current price if you own the stock, or a strike that you believe the stock won't reach if you're selling naked. For selling puts, you want a strike below the current price that you believe the stock won't fall to.
Sub-heading: Crafting Your Strategy
Covered Call: (Level 1/2) You own 100 shares of a stock and sell a call option against it.
Goal: Generate income (premium) from your existing holdings.
Risk: Limited upside participation beyond the strike price, and downside risk if the stock falls significantly.
When to use: You're neutral to moderately bullish on the stock, or you're willing to sell your shares at the strike price.
Cash-Secured Put: (Level 1/2) You sell a put option and set aside enough cash in your account to buy the 100 shares if assigned.
Goal: Generate income (premium) or acquire shares at a lower price.
Risk: Obligation to buy shares if the stock falls below the strike, potentially at a higher price than the market value.
When to use: You're neutral to moderately bullish on the stock, and you'd be happy to own the shares at the strike price.
Naked Call: (Level 3/4) You sell a call option without owning the underlying stock.
Goal: Generate premium based on a strong bearish or neutral outlook.
Risk: Potentially unlimited loss if the stock price rises significantly. Extremely high risk.
When to use: Only for highly experienced traders with a strong conviction that the stock will not rise above the strike price, and with robust risk management in place.
Naked Put: (Level 3/4) You sell a put option without having the cash to cover the purchase of the underlying stock if assigned (though you still need sufficient margin).
Goal: Generate premium based on a strong bullish or neutral outlook.
Risk: Significant loss if the stock price falls drastically.
When to use: Only for highly experienced traders with a strong conviction that the stock will not fall below the strike price, and with robust risk management.
Step 4: Placing Your Order on E*TRADE - The Execution
Now that you have your strategy, it's time to place the order. E*TRADE offers a user-friendly platform for this.
Sub-heading: Navigating the E*TRADE Platform
Log in to E*TRADE: Access your account either through the website or the Power E*TRADE platform.
Search for the Underlying Asset: Use the search bar to find the stock or ETF you want to trade options on (e.g., "AAPL" for Apple).
Access the Options Chain: On the stock's page, you'll see an "Options" or "Options Chain" tab. Click on it.
Sub-heading: Building Your Options Sell Order
Select Expiration Date: Choose the desired expiration month and year from the options chain.
Choose Call or Put: Decide whether you're selling a call or a put option.
Select Strike Price: Find the strike price that aligns with your strategy.
Initiate "Sell to Open": This is the crucial step for initiating a new options selling position.
When you click on the "Bid" price of a call option, you are typically initiating a "Sell to Open" order for that call.
When you click on the "Ask" price of a put option, you are typically initiating a "Sell to Open" order for that put.
Important Note: Make sure the order type is "Sell to Open." You are opening a new short position. If you select "Sell to Close," you would be closing an existing long options position.
Specify Quantity: Options contracts typically represent 100 shares of the underlying asset. Enter the number of contracts you wish to sell (e.g., "1" for 100 shares, "5" for 500 shares).
Choose Order Type:
Limit Order: Highly Recommended for Options Selling! This allows you to specify the exact price (premium) you want to receive for selling the option. Your order will only execute at that price or better. This is crucial for controlling your entry price.
Market Order: Generally not recommended for options due to potential slippage and volatile price swings, especially for less liquid options.
Stop Orders: Can be used for managing risk, but be careful with their execution in fast-moving markets.
Time in Force:
Day Order: Expires at the end of the trading day if not filled.
Good 'Til Canceled (GTC): Remains active until filled or canceled (up to a certain period, usually 60 days).
Review and Confirm: E*TRADE will display a summary of your order, including the premium you expect to receive, potential max profit/loss, and margin requirements (if applicable). Review this carefully! Make sure everything is correct before confirming the trade.
Step 5: Monitoring and Managing Your Position - The Ongoing Process
Selling options isn't a "set it and forget it" strategy. Continuous monitoring and active management are essential.
Sub-heading: Tracking Your Trade
Portfolio View: E*TRADE's portfolio section will show your open options positions. You'll see the current market value of your options, your profit/loss, and how much time is left until expiration.
Real-time Quotes: Keep an eye on the underlying stock's price and the option's price.
News and Events: Stay informed about any news, earnings reports, or economic events that could impact the underlying asset.
Sub-heading: Adjusting and Closing Positions
Profit Taking: If your option has lost most of its value (due to time decay or favorable price movement), you might want to "buy to close" it early to lock in your profits and avoid assignment risk. This means buying back the same option contract you sold.
Loss Mitigation: If the trade moves against you and you're facing significant losses, consider "buying to close" the option to limit your downside. Don't let a small loss turn into a large one.
Rolling the Option: If you're still bullish (for a put) or bearish (for a call) on the underlying asset, but the option is getting close to your strike price, you might "roll" the option. This involves:
Buying to close your existing option.
Simultaneously selling a new option with a later expiration date and/or a different strike price. This allows you to extend the trade and potentially collect more premium.
Assignment: If the option is "in the money" (ITM) at expiration (or even before), you may be assigned.
For a short call: You'll be obligated to sell 100 shares per contract at the strike price. If you own the shares (covered call), they'll be sold. If you don't (naked call), you'll be forced to buy them at the market price and then sell them at the strike price, potentially incurring significant losses.
For a short put: You'll be obligated to buy 100 shares per contract at the strike price. You'll need sufficient cash in your account to cover this purchase.
Expiration: If the option expires "out of the money" (OTM), it becomes worthless, and you keep the entire premium collected. This is the ideal scenario for option sellers.
Step 6: Continuous Learning and Risk Management - The Long Game
Options trading, especially selling, is a journey of continuous learning. Market conditions change, and new strategies emerge.
Sub-heading: Essential Risk Management Principles
Position Sizing: Never allocate more capital to an options trade than you are comfortable losing. Start small.
Diversification: Don't put all your eggs in one basket. Spread your options trades across different underlying assets and strategies.
Stop-Loss Orders: While not always perfect for options, consider using them on the underlying stock to protect your position.
Understand Margin Requirements: If you're trading on margin, be fully aware of the maintenance requirements and potential margin calls. E*TRADE will provide these details.
Review and Adjust: Regularly review your trades. What went well? What could have been better? Adjust your strategy based on your experiences and market conditions.
Utilize E*TRADE's Educational Resources: E*TRADE offers a wealth of educational content, including webinars, articles, and tutorials on options trading. Take advantage of them!
By following these steps and committing to ongoing education and disciplined risk management, you can navigate the world of options selling on E*TRADE more effectively and potentially enhance your investment returns.
10 Related FAQ Questions
How to get approved for options trading on E*TRADE?
You apply for options trading privileges through your ETRADE account, providing details on your financial situation, trading experience, and investment objectives. ETRADE assesses this information to grant an appropriate options approval level.
How to sell covered calls on E*TRADE?
To sell covered calls, you must first own at least 100 shares of the underlying stock. Then, navigate to the options chain for that stock on E*TRADE, select a call option with your desired strike price and expiration, and choose "Sell to Open" for the appropriate quantity of contracts.
How to sell cash-secured puts on E*TRADE?
To sell cash-secured puts, you need to have sufficient cash in your E*TRADE account to buy 100 shares of the underlying stock at the strike price. Go to the options chain, select a put option, and choose "Sell to Open," ensuring you have the required cash collateral.
How to close an options position on E*TRADE?
To close an options position you previously sold, you will perform the opposite action: "Buy to Close." Navigate to your portfolio, find the open short options position, and select the option to "Buy to Close" at the current market price (or set a limit order).
How to roll an options position on E*TRADE?
Rolling an option involves simultaneously buying to close your existing option and selling to open a new option with a different strike price and/or expiration date. E*TRADE often provides a "Roll" feature directly from your positions tab to facilitate this combined transaction.
How to understand E*TRADE options commissions?
E*TRADE charges a per-contract fee for options trades. This fee is typically $0.65 per contract, but it can be reduced to $0.50 per contract if you execute 30 or more stock, ETF, and options trades per quarter.
How to find implied volatility on E*TRADE's platform?
Implied volatility (IV) is usually displayed within the options chain or detailed option quote pages on ETRADE's platform (especially on Power ETRADE). Look for a column or data point labeled "Implied Volatility" or "IV."
How to use E*TRADE's options analysis tools?
ETRADE offers various options analysis tools, particularly on the Power ETRADE platform, such as "Snapshot Analysis" or "Strategy Labs." These tools help you visualize potential profit/loss scenarios for different options strategies before placing a trade.
How to manage risk when selling options on E*TRADE?
Effective risk management involves choosing appropriate options approval levels, starting with defined-risk strategies (like covered calls or cash-secured puts), properly sizing your positions, diversifying, and actively monitoring and adjusting your trades.
How to get help with options trading on E*TRADE?
E*TRADE provides extensive educational resources, including articles, videos, and webinars. You can also contact their customer support or speak with an options specialist for personalized assistance.
