Buying vs Selling Premium: When to Do Which with Mike Butler

Key Concepts

• Short Premium: Selling options to collect credit, relying on time decay (theta) and implied volatility (IV) contraction.
• Long Premium: Buying options to profit from directional moves, requiring a move in the underlying asset to overcome time decay.
• Undefined Risk: Strategies (like naked puts or strangles) where the potential loss is not capped, requiring careful position sizing and management.
• Defined Risk: Strategies (like spreads) where the maximum loss is known upfront.
• Implied Volatility (IV): A metric representing the market's expectation of future price movement; high IV makes options more expensive.
• LEAPS (Long-Term Equity Anticipation Securities): Options with expiration dates longer than one year.
• Cost Basis Reduction: The practice of selling shorter-term options against a long-term position to lower the net entry price.
• Variance: The fluctuation in price; the ability to withstand market swings is critical for position sizing.

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1. Strategic Framework: Short vs. Long Premium

Mike emphasizes that there is no "better" strategy, only a "time and place" for each.

• Short Premium: Generally higher probability of profit. It is best suited for index products (SPX, MES) because they lack the "binary" risk of individual equities (e.g., sudden 20% gaps due to CEO departures or earnings surprises).
• Long Premium: Lower probability of profit if held to expiration. Mike argues that if you buy options, you should avoid near-term (0–7 day) expirations, as they are highly susceptible to rapid time decay and IV crush. Instead, he prefers LEAPS to capture long-term delta while avoiding near-term IV spikes.

2. Methodology: Managing Positions

• Undefined Risk Management: When selling naked options, the primary advantage is flexibility. If a trade moves against you, you can "roll" the position—buying back the current option and selling a new one in a later expiration cycle to collect more credit and adjust the strike price.
• Cost Basis Reduction: For long-term bullish positions (e.g., Nike or Microsoft), Mike uses Calendar or Diagonal Spreads. He buys a long-term LEAP and sells a shorter-term option against it. This reduces the cost basis and improves the probability of success.
• The "Sweet Spot": Mike identifies the 30- to 60-day window as the optimal timeframe for selling premium, as it offers a favorable balance between high IV and time value decay.

3. Real-World Applications & Case Studies

• Nike (NKE): With the stock at decade lows, Mike opted for a long-term LEAP (Jan 2028) rather than selling a put. This avoids the risk of an undefined loss during earnings volatility while allowing him to participate in a potential recovery.
• Microsoft (MSFT): Mike utilized a long-term calendar spread (buying Jan 2027, selling Sept 2024). This allowed him to maintain a bullish thesis while collecting premium to offset the cost of the long-term option.
• MES (Micro E-mini S&P 500): Mike highlights his year-long strategy where he has continuously manipulated the position by rolling strikes and expirations, turning an initial credit into a significantly larger one over time.

4. Key Arguments and Perspectives

• "You get what you pay for": When buying premium, paying for longer-term options (LEAPS) provides more time for a thesis to play out, whereas near-term options are "super decaying assets."
• The Importance of Position Sizing: Mike stresses that if a market move causes your account to "suffer," your position size is likely too large. You must be able to withstand the variance of the product you are trading.
• Index vs. Equity: Indices are safer for short-premium strategies because they are less prone to the extreme, unpredictable gaps seen in individual stocks.

5. Notable Quotes

• "If you can trade successfully short premium on both sides of a market in an equity, you can definitely do that in the S&P 500 simply because the S&P 500 moves less."
• "I want to make sure that I am reducing my cost basis and improving my probability of success anywhere I can."
• "If you're buying options, you get what you pay for."

6. Synthesis and Conclusion

The core takeaway is that successful trading requires matching the strategy to the product and the market environment. Short premium is a high-probability approach that demands the ability to manage and roll positions (especially in undefined risk scenarios). Long premium is best utilized through long-term instruments (LEAPS) to avoid the "decay trap" of short-term options. Regardless of the strategy, the trader must prioritize position sizing to withstand market variance and use techniques like rolling or selling against long positions to actively manage risk and reduce cost basis.