Options trading can seem complex, but it offers powerful strategies for income generation, hedging, and speculation. Selling options, in particular, can be a great way to generate premium income, but it also carries unique risks. If you're looking to explore selling options on E*TRADE, you've come to the right place! This comprehensive guide will walk you through the process step-by-step.
Before we dive in, let me ask you: Are you ready to potentially unlock new avenues for your investment portfolio? If your answer is a resounding "Yes!", then let's get started.
Understanding the Basics of Selling Options
When you sell an option, you are effectively becoming an option writer. This means you are taking on an obligation in exchange for a premium (the price the buyer pays you).
Selling Call Options: When you sell a call option, you are giving the buyer the right to purchase the underlying asset from you at a specific price (the strike price) before a certain date (the expiration date). You hope the stock price stays below the strike price so the option expires worthless, and you keep the premium.
Covered Calls: This is a common strategy where you sell call options on shares of stock you already own. This limits your risk, as you can deliver the shares if assigned.
Naked Calls (Uncovered Calls): This is a much riskier strategy where you sell call options without owning the underlying stock. If the stock price rises significantly, your potential losses are theoretically unlimited.
Selling Put Options: When you sell a put option, you are giving the buyer the right to sell the underlying asset to you at a specific price (the strike price) before a certain date (the expiration date). You hope the stock price stays above the strike price so the option expires worthless, and you keep the premium.
Cash-Secured Puts: You set aside enough cash in your account to purchase the shares if the option is exercised. This limits your risk to the value of the shares at the strike price.
Naked Puts (Uncovered Puts): Similar to naked calls, this is very risky as you are obligated to buy the stock at the strike price if assigned, regardless of how far it falls.
Important Note: Selling naked options (calls or puts) involves significantly higher risk and often requires higher approval levels and margin in your account.
Step 1: Ensure You Have the Right E*TRADE Account and Approval Level
Before you can even think about selling options, you need to make sure your E*TRADE account is set up for it and you have the appropriate trading approval.
Sub-heading: Account Type and Margin
Brokerage Account: You'll need a standard brokerage account with E*TRADE.
Margin Account: For most option selling strategies, especially those involving selling puts or advanced strategies, you will likely need a margin account. A margin account allows you to borrow money from E*TRADE to leverage your trades, which is often required for the collateralization of options contracts. Even for cash-secured puts, having a margin account can sometimes simplify the process.
Sub-heading: Options Trading Approval Levels
E*TRADE, like most brokers, has different "levels" of options trading approval based on the complexity and risk of the strategies you want to employ. Selling options, particularly uncovered ones, requires higher approval levels.
Level 1 (Basic): Typically allows buying calls and puts (long options).
Level 2: Often includes covered calls and cash-secured puts. These are generally considered less risky as your potential loss is defined.
Level 3: May include spreads (e.g., credit spreads), which involve selling and buying options simultaneously.
Level 4 (Highest): This level usually grants permission for selling naked or uncovered calls and puts, which carry the highest risk.
To check or upgrade your approval level:
Log in to your E*TRADE account on their website.
Navigate to your Account Settings or Trading Preferences.
Look for a section related to Options Trading. Here you should be able to see your current approval level and find an application to request an upgrade.
You will typically need to answer questions about your financial situation, trading experience, and investment objectives. Be honest but also demonstrate a clear understanding of options risks to increase your chances of approval for higher levels. ETRADE needs to ensure you understand the risks involved.*
Step 2: Research and Identify Potential Opportunities
This is where the real work begins! Selling options requires a good understanding of the underlying asset and your market outlook.
Sub-heading: Choosing the Underlying Asset
Understand the Stock/ETF: Don't just pick any stock. Choose companies or ETFs you are familiar with, whose fundamentals you understand, and that you have a view on.
Liquidity: For options, liquidity is key. Look for underlying assets with high trading volume in their options contracts. This ensures you can easily enter and exit your positions without significant price slippage.
Volatility: Options thrive on volatility. Higher implied volatility generally means higher option premiums, which can be attractive for sellers. However, it also means greater risk of the option moving against you.
Sub-heading: Defining Your Outlook and Strategy
For Selling Calls (Covered Calls): You typically sell covered calls on stocks you own and believe will stay relatively flat or slightly decrease in price. Your goal is to collect premium while being willing to sell your shares if they reach the strike price.
For Selling Puts (Cash-Secured Puts): You sell cash-secured puts on stocks you wouldn't mind owning at a lower price. You believe the stock will stay above the strike price, or if it drops, you're comfortable buying it at that price. This can be a way to acquire shares at a discount while collecting income.
Time Horizon: Options have expiration dates. Decide on a suitable timeframe for your strategy. Shorter-dated options decay faster, which can be beneficial for sellers, but also means less time for the underlying to move in your favor.
Sub-heading: Utilizing E*TRADE's Research Tools
E*TRADE offers a robust suite of tools to help you with your research:
Power E*TRADE Platform: This platform is specifically designed for active traders and offers advanced charting, options chains, and analytical tools.
Options Chains: This is where you'll find all the available options contracts for a given underlying asset, showing strike prices, expiration dates, bid/ask prices, volume, and open interest.
Analytic Tools: E*TRADE provides features like "Strategy Builder," "Probability Calculator," and "Greeks" (Delta, Gamma, Theta, Vega) to help you analyze potential outcomes and risks. Pay close attention to Theta (time decay) as it works in your favor when selling options.
Step 3: Building Your Trading Plan
A solid trading plan is crucial for disciplined options trading.
Sub-heading: Determine Your Entry and Exit Points
Strike Price Selection: Based on your outlook, choose a strike price that aligns with your risk tolerance and profit objectives. For covered calls, you might choose a strike price slightly above the current market price. For cash-secured puts, you might choose a strike price below the current market price.
Expiration Date Selection: Consider how much time you want the trade to have to play out.
Profit Target: Define at what point you will close the position to realize a profit. For options selling, this often happens when the option premium has decayed significantly.
Stop-Loss (Risk Management): This is paramount for selling options. Always have a plan to exit a losing trade. This could be a specific price for the underlying, a percentage loss on the option premium, or a certain level for the option's delta.
Sub-heading: Position Sizing and Risk Management
Capital Allocation: Never allocate more capital than you are willing to lose, especially with options.
Understand Maximum Loss: Clearly define the maximum potential loss for your chosen strategy. For covered calls, it's the difference between your stock purchase price and the strike price (plus the premium collected) if the stock falls. For cash-secured puts, it's the strike price minus the premium collected, as you might be obligated to buy the stock at the strike price.
Margin Requirements: Be aware of the margin requirements for your chosen strategy. E*TRADE will inform you of these, and it's essential to maintain sufficient funds to avoid margin calls.
Step 4: Entering Your Sell Order on E*TRADE
This is where you execute your trade!
Sub-heading: Navigating to the Options Order Ticket
Log in to E*TRADE.
Search for the underlying stock/ETF you wish to trade options on.
On the stock quote page, look for an "Options" or "Options Chain" tab or link.
You will see a list of expiration dates. Select your desired expiration date.
The options chain will display calls (left side) and puts (right side) for various strike prices.
Locate the specific option contract you want to sell (e.g., a call with a particular strike price and expiration, or a put with a different strike and expiration).
Click on the "Bid" price for the option you wish to sell. This will typically pre-populate an order ticket for a "Sell to Open" order.
Sub-heading: Filling Out the Order Ticket
The order ticket is crucial. Double-check every detail before placing your order.
Action: This should be "Sell to Open." (If you're closing an existing sold position, it would be "Buy to Close.")
Quantity: Enter the number of option contracts you want to sell. Remember, one option contract typically represents 100 shares of the underlying asset.
Order Type:
Limit Order (Recommended for selling options): 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 generally preferred for selling options to ensure you get your desired premium.
Market Order: This will execute your order immediately at the best available price. Avoid market orders for options, especially less liquid ones, as you might get an unfavorable fill.
Price (for Limit Orders): Enter the premium per share you want to receive. The total premium received will be this price multiplied by 100 (shares per contract) and then by the number of contracts.
Time in Force:
Day: The order remains active until the end of the trading day.
Good 'til Canceled (GTC): The order remains active until it's filled, canceled, or expires.
Review Order: Always, always, always review your order details carefully before clicking "Place Order." Ensure the correct underlying, strike price, expiration date, option type (call/put), quantity, and price are selected.
Step 5: Monitoring Your Position and Managing Risk
Placing the order is just the beginning. Active management is vital for options trading.
Sub-heading: Tracking Your Position
Portfolio View: E*TRADE's portfolio page will show your open options positions. Monitor their profit/loss, intrinsic value, and time decay.
Alerts: Set up alerts on the E*TRADE platform to notify you of significant price movements in the underlying asset or your options contract.
The "Greeks": Keep an eye on the "Greeks," especially Theta (time decay), which works in your favor as a seller, and Delta, which indicates how much the option price is expected to move for every $1 change in the underlying.
Sub-heading: Adjusting or Closing Your Position
Profit Taking: If the option premium has decayed significantly and you've reached your profit target, you can "Buy to Close" the option. This means you buy back the same option contract you sold, hopefully at a lower price, locking in your profit.
Loss Management: If the trade moves against you (e.g., for a sold call, the stock price rises significantly), you might need to "Buy to Close" the option to limit your losses. This is where your pre-defined stop-loss comes into play.
Rolling Options: Sometimes, instead of closing a losing position, you might choose to "roll" the option. This involves closing your current option and opening a new one with a different strike price or expiration date, often to extend the time horizon or adjust your strike. This is a more advanced strategy.
Assignment: Be aware of the possibility of assignment. If you sell an option that finishes in-the-money at expiration (or is exercised early), you will be obligated to fulfill the contract. For a sold call, you'll have to sell your shares (if covered) or buy them on the open market (if naked). For a sold put, you'll have to buy the shares.
Step 6: Learning and Continuous Improvement
Options trading is a journey, not a destination.
Sub-heading: Utilize E*TRADE's Educational Resources
E*TRADE offers a wealth of educational materials:
Webinars and Courses: They frequently host webinars and offer structured courses on options basics, strategies, and risk management.
Articles and Videos: Their knowledge center has numerous articles and videos explaining various options concepts.
Paper Trading (Simulated Trading): ETRADE's Power ETRADE platform often includes a paper trading feature. This is an invaluable tool for practicing options selling strategies with virtual money before risking real capital.
Sub-heading: Review and Adapt Your Strategies
Journal Your Trades: Keep a detailed record of all your options trades, including your rationale, entry/exit points, and outcomes.
Analyze Performance: Regularly review your trading performance to identify what's working and what's not.
Stay Informed: Keep up with market news and developments that could impact your underlying assets and options positions.
Frequently Asked Questions (FAQs)
Here are 10 common "How to" questions related to selling options on E*TRADE:
How to check my options approval level on E*TRADE?
Log in to E*TRADE, go to "Account Settings" or "Customer Service," and look for "Options Trading" or "Trading Preferences." You'll see your current level and usually an option to apply for an upgrade.
How to apply for a higher options trading level on E*TRADE?
Within the "Options Trading" section of your account settings, you'll typically find an application form. This will require you to answer questions about your financial situation, trading experience, and investment objectives.
How to find options chains for a specific stock on E*TRADE?
Search for the stock symbol in the search bar. On the stock's quote page, look for an "Options" or "Options Chain" tab/link.
How to choose the right strike price when selling options on E*TRADE?
Consider your market outlook. For covered calls, pick a strike above the current price you're comfortable selling at. For cash-secured puts, choose a strike below the current price you'd be willing to buy at. Utilize E*TRADE's options analysis tools to gauge probabilities.
How to set a limit order when selling options on E*TRADE?
On the options order ticket, select "Limit" as the order type. Then, input the desired premium per share you want to receive for selling the option.
How to close a sold option position on E*TRADE?
Go to your "Portfolio" or "Positions" page, locate the option you sold, and click the "Trade" or "Close" button. The action will typically default to "Buy to Close." Confirm the order details and place it.
How to use E*TRADE's paper trading for options?
Access the "Power E*TRADE" platform. Look for a "Paper Trading" or "Simulated Trading" option. This allows you to practice options strategies with virtual money without real risk.
How to understand options "Greeks" on E*TRADE?
ETRADE's options chains and analysis tools display the Greeks (Delta, Gamma, Theta, Vega). You can find educational resources on ETRADE's "Knowledge Center" to understand what each Greek represents and how it impacts your options positions.
How to avoid margin calls when selling options on E*TRADE?
Maintain sufficient cash or collateral in your margin account. Understand the margin requirements for the strategies you employ. Monitor your positions closely and be prepared to add funds or close positions if your account equity falls below the maintenance margin.
How to get help with options trading on E*TRADE?
E*TRADE offers customer support via phone, chat, and email. They also have dedicated options specialists. Explore their "Knowledge Center" for extensive articles, videos, and webinars.