How to Make Money by Options Trading

It is understandable that a new investor is eager to start making money from options. They have done their research, they understand what options are, and they have some money that they are looking to invest. Before jumping into things, it’s good to learn a little bit more about options and carefully examine their pros and cons before one is ready to trade.

What Exactly Is Trading in Options?

Options trading is a complicated topic. Books have been dedicated to it, so it is not possible to cover every facet of it in a short time. However, there are a few things you can look at to see a typical example of buying call options.

Put in the simplest terms, options are a type of contract. They involve two parties- the option holder and the option issuer. The option holder has the right to engage in a transaction with the issuer. However, the holder is not obligated to carry out said transaction.

• Call options give the right to buy
• Put options give the right to sell
• The strike price is the agreed-upon price for the asset based on the contract

The stock that an investor likes the most (SYLM) is currently at $30.50. They think it has prospects for the future and believe that within a few months it’s going to be trading at $50 or more. With that in mind, they open a brokerage account and purchase 10 SYLM call options. In 90 days, they are going to expire, and they are stuck at $50.

The 90 days comes and the SYLM did gain in value, but only to $46. Every cent invested is lost. The truth is that their instincts were correct. They predicted the price, but they still lost money. This simple illustration helps one see that there are a number of factors that go into making money trading options.

It’s not enough to just buy calls and sit back and wait for the stock price to rise so that an investor can make money. Can you make money trading options? Yes, but here are some factors you should consider first:

• Will the stock rise in price?
• How much will the stock rise?
• What time frame will the rise occur in?

Do Not Hold onto Them for Too Long

Options are described as “wasting assets.” When investing in options, an investor should have an exit strategy. An investor wants to get out of the trade as soon as it becomes profitable or feasible. A common trap people fall into is to fall in love with an option trade and hold onto it until the last day because they are hoping that they are going to get an even greater profit.

With options, sometimes one can get the target profit. Other times they give up on the trade and sell the option while it still has some value. If the stock price reaches the target or gets close to the target, it’s time to take the money and sell the option.

Pay Attention to the Stock Market

Is the market bullish or bearish? These factors may give a person an indication as to what the stock a person is betting on is going to do. The more factors one considers, the higher chance they have of earning money. The fewer factors an investor considers, the higher chance there is of losing money, especially when talking about OTM options.

Investing in the market is not a matter of belief or faith. When purchasing options, the price offered has a lot to do with the potential profitability of the trade. The price of the option is greatly influenced by potential profitability connected to the trade. This plays a bigger role in the trade than the actual price of the underlying stock. So don’t pay too much for options because of implied volatility.

Can a Person Make Money with Trading Options?

Absolutely. With call options trading, an investor can never lose more money than what they originally paid for the call option contract. This means that call options offer basically unlimited earning potential with a controlled risk for loss.

For example, if an investor purchases a call option contract for one dollar per share that has a strike price of $10 and the price rises to $1,000, the call options now have an intrinsic value of $900 per share. This means that an investor would have some ridiculous profits on their hands.

If they fall to $0 dollars per share, the only loss the investor has is what they have paid for the contract. If they purchased a contract for 100 shares at one dollar each, the maximum they are going to lose in the above scenario is what they paid for the contract. But they have the potential of earning over $90,000.

Success depends on a person not jumping in blind. A person needs to take the time to consider their goals, understand how trading options work, and make informed financial decisions.