Here's How Much Money You Can
Make Trading Options
Trading options is not the first venture you’d think of when it comes to making a killing off trading. You’ve probably heard of someone who’s made a fortune from trading stocks or foreign exchange, but rarely is it from trading options. However, if you perfect the art, trading options can be a goldmine.
Options trading is less risky than conventional stock trading, especially short stocks. You also don’t need a whole options trading course to perfect the art. It’s straightforward but requires some level of hard work, determination, and a bit of luck.
So, can you make money trading options? Well, of course, you can; loads of it. Keep reading to learn about how you can make money trading options and what the benefits of trading options are.
What Is Options Trading?
Options are derivatives of underlying securities such as assets or stocks. Trading options is the buying and selling of these options contracts. The one who holds the option has a right to sell the underlying stock but is under no obligation to sell it.
There are two main types of options contracts that options traders mainly trade. These are:-
Put options- These give the holder the right to sell the asset at a particular cost within a stipulated period.
Call options- With call options, the holder can buy the asset at a particular price but within some period.
Both contracts have an expiry date and the holder must exercise each option before that date. The price for a specific asset specified on an option is known as the strike price.
Trading options involves only paying pennies or dollars compared to the real share price of the stock. Online brokers provide a platform for the buying and selling of options. However, there are a few things you should know before getting into options trading.
How Can You Make Money Trading Options?
The simple answer is yes. The much better question would be, can you make a lot of money trading options? Yes, in fact, you can make a living off the trade, but it depends on how much time and effort you devote to trading options.
With trading options, no matter how the market moves, there’s always a way you can make money. Even if the market remains static, there’s still a way you can make money trading options.
One great thing about trading options is that it requires a small starting capital. That means you don’t have to worry about losing a bundle when your trade doesn’t go as planned. However, you also need to tread softly or you could lose most if not all your initial capital investment.
Advantages of Trading Options
Despite the opportunity to make a ton of money, trading options also have a lot of other advantages. Here are a few benefits of trading options.
It’s Cost-Effective
You don’t have to invest your entire life savings to make a killing from trading options. It’s for this reason that trading options is such an attractive choice for many investors. It gives a level playing field for large investors with huge budgets and beginners with limited initial capital.
The reason why you can make such huge profits from a little capital investment is because of leverage. To better your understanding, let’s look at a hypothetical situation.
Dave has about $600 that he wishes to invest in Tesla that’s trading at the moment at $15 per stock. Dave did his research and knew that the stock price would rise, and it did to $20.
Dave used all his $600 to buy 40 stocks in Tesla, which rose to $20. This means he would make a 33.3% return on investment. Alternatively, Dave could have bought call options on the same stock at the strike price of $15 trading for two dollars each. Dave could’ve bagged himself 300 call options that translate to 600 shares.
When the price went up, Dave could then utilize the option to buy 600 shares that sell for $20 per share. That means Dave would have gone home with a whopping $6,000 out of $500. Of course, things can always go the other way, but you get the point.
Flexible and Versatile
You can trade options virtually anywhere with an internet connection. That means you can do it in your free time and get you some passive income. As mentioned earlier, you trade options through online brokers and retailers; all you have to do is sign up and start trading.
Traders can utilize a couple of strategies before the expiry of an options contract. Some of these strategies include:-
- Find another investor and sell the “ ITM” options contract
- Utilize the option and buy shares
- Exercise the option and buy shares to sell part or all of them
- Sell the contract to another investor before it expires to recover the money you spent on an “out of the money” options contract
An out of the money options contract has its strike price lower than the market price.
There’s Not Much to Lose for Option Buyers
Remember, a holder of both a put or call option has no obligation to complete the trade. That means if you made the wrong prediction about the trajectory of the stock, then you lose nothing. What you lose is maybe the trading fees and whatever money you paid for the options contracts.
You Can Fix a Stock Price
An investor can freeze the stock price at a specific dollar amount, but only for a given period. This means that as long as you have the right option, investors have to trade the stock at the strike price before it expires. This means you can still make money even when the market is static.
Make Money Through Trading Options
“Can you make money trading options?” This is a question you can now comfortably answer.
Remember, trading options takes a lot of dedication and knowledge of the fundamentals. So before joining the trade, make sure you have the basics on lock.
Sometimes, options trading can get tiresome, but we’ve got the right information to help you. Have a look at the other pieces on our site for more enticing and informative reads.