About The Premium FIRE

I created this site as a way to share tools, techniques, and actions you can take in the options market to accelerate your progress toward FIRE – the somewhat awkwardly named “financial independence, retire early” phenomenon — where your passive income streams and investments cover your expenses and active work becomes optional. My angle here in particular is my love of selling options premium.

What does this mean?

  • Premium refers to the price of an option. I like to think it’s called premium because options can be viewed much like an insurance policy — most options plays can be boiled down to a bet whether the price of any given underlying equity (read: stock or future) will or will not be at a certain level by the date the option expires. Many organizations use options like insurance policies to protect profits or to reduce losses in the event their larger long-term bets end up being wrong.
  • Selling premium refers to being on the side of having sold the option. You can sell an option or buy an option. When you buy an option, you have to be right about two things — the actual price, and when the price will get there, as all options have expiration dates. When you buy an option, the value of what you bought dies a little with every passing moment because of that expiration date. When you sell an option, the value of what you sold dies with each moment, too, but that means you can buy back what you sold at a lower price and pocket the difference as your profit. Put simply, when you sell an option, you can be wrong about both time and price and still make money. More on that in a bit.

I like selling options for two reasons – the richness of the implied volatility, and theta.

  • The richness of the implied volatility. One of the big reasons there is a large option market is because of the volatility of the stock market, but it’s a proven mathematical fact that the price of options is overstated relative to the actual volatility experienced by the market. (For options pros, they’ll say something like, “implied volatility is overstated compared to historical volatility.”) What this means in practice really is that you’re likely to come out ahead selling options because the premiums you can get selling them are juicier than they should be if all other things were equal.
  • Theta. Theta refers to time. All options have an expiration date. It might be today, in a few hours, it might be next week, or it might be two years from now. But all options expire at some point, and their value erodes as that time ticks down–this erosion is known as theta decay. I like to profit from theta decay because it’s another avenue that I can be wrong and right at the same time, or right in two ways — I can sell an option around a certain price level (strike) and a certain expiration date. Whether or not I am right about the strike price, the value of what I sold erodes with every passing second, and that’s putting money in my pocket. I could be wrong about a strike price and still make money off theta decay. If I am right about a strike price, I make money faster because of theta decay, because options value is not just driven by time (theta), but also by delta (price action). But that’s a lecture for another day.

I like to sell premium on major indices (like the Dow, the NASDAQ, the S&P 500, the Russell 2000, and even futures index contracts like the ES and NQ) far away from where price is, in a natural point in the theta decay curve where the value of the option doesn’t get bounced around too much based on price action but still tends to decay more quickly than in other times. This is a bit of a sweet spot and it’s different for each market. I also look to capture only a piece of the decay — I am not trying to sell something for $100 and take it all the way to expiration day, where it’s worth zero, and pocket 100% of the maximum profit of the position. Rather, I am trying to capture a very predictable, consistent portion of premium that’s likely to come out of options with expiration dates in the part of the cycle I like to target regardless of what happens within the larger market price action.

Selling premium like this is fantastic passive income. If you do it well, unless there is armageddon, you should never have to take a loss (the cost you will pay is time, not loss of funds, as you position for recovery), your positions will constantly work for you from a theta perspective, and you can augment either your employment income or, if you have a big enough war chest, sell enough premium to cover your daily, monthly, and yearly expenses.

Curious? Stick around and learn more.