A Simple Guide to Make Money from Options Trading
How to Make Money from Options Trading; An option is a contract that gives its owner the right to buy or sell an asset at an agreed-upon price. The agreed upon price is known as the strike price during or before a specified period of time, typically within the next year.
Options are valued according to their upside potential and the probability of their corresponding outcome occurring in the future.
READ ALSO Top 7 Stocks Suitable For Stock Options Trading
The Three Most Common Mistakes Traders Make
The most common mistake that traders make is not following their trading plan. It’s important to have a set of rules that you can follow no matter what the market does.
If you’re not disciplined in your trading, you’ll be just as likely to make mistakes when the market goes your way, which will greatly reduce your profit potential.
The second most common mistake is over-trading, or trying too hard and making more trades than necessary. If you focus on one trade at a time and follow your trading system, there’s less chance for error.
The third most common mistake traders make is not having an edge. Simply put, if you don’t know why you’re buying or selling an option (or anything else), then it’s probably best to do nothing until something changes in the marketplace.
Types of Options Trades
There are basically two types of option trades you can make, the call options and put options.
CALL OPTIONS: The call is an option that gives its owner the right to buy a stock at a certain price (strike price) before it reaches its expiration date.
PUT OPTIONS: The put is an option that gives its owner the right to sell a stock at a certain price (strike price) before it reaches its expiration date.
If you want to own 100 shares in XYZ Company, but theyâ€™re too expensive, then you can buy one call contract for 100 shares of XYZ company with a strike price $15 or lower. If your investment becomes profitable and XYZ company increases in value past $15 per share then you will have made money on the trade.
With options trading there is more risk involved because if the market changes direction after your purchase, your losses could exceed your initial investment.
Strategies for Winning Trades
- Take the time to understand the basics of options trading before you start trading. It’s important that you know what an option is and how it can be used as a financial instrument. You should also learn about some of the terms associated with options trading, such as strike price and expiration date.
- Become familiar with various types of options strategies, including bull call spreads, bear put spreads, bull put spreads, bear call spreads, vertical spreads and ratio trades.
- Establish a trading plan that takes into account your risk tolerance, trading style and time frame. For example, if you’re more aggressive, you might want to focus on call spreads and credit spreads; if you are more conservative, maybe a bull put spread is better for you.
- Review your trade plan and strategies with a qualified financial advisor before you execute any trades if possible, especially if you are trading in an IRA or other retirement account.
- If you decide that option trading isn’t right for you, don’t give up. Instead, just look at it as a learning experience and ask yourself what you can do differently next time. Remember that trading is not just about making money; it’s also about understanding markets and how they work so that you can make better informed decisions in future trades.
- Review your trades every month and track their performance. This will help you determine which types of trades work best for you and allow you to improve over time. As an extra step, consider recording video of each trade so that you can analyze it later.
- If you plan to continue trading options in retirement, be sure that you are doing so within your tax and asset allocation plan. Speak with a qualified financial advisor before beginning any investment strategy if possible.
- If you have any concerns about your ability to trade options safely and responsibly, refrain from trading them at all. You should never trade with money that you cannot afford to lose without it impacting your lifestyle and goals.
- If you follow these strategies and you still end up losing money on your option trades, look for areas where you might have to improve your approach. Learn from those mistakes and use them to guide your future trades.
- If you’re still having trouble, consider trading options on paper (virtual option trading) before risking your own money. You can learn a lot about options and their risks and rewards by doing so, which may help you make better decisions when it comes time to execute your actual trades.
Read also: Stock Options Trading Strategies For Small Portfolios
How much do options traders make?
The Options Industry Council found that the median income for an options trader is $91,000 a year. The top 10% of traders make over $350,000 a year. You can expect your income to grow as you gain more experience. But it takes time and effort to learn how the markets work.
Some people like the quick money that day trading offers; others are more interested in investing their time and money in stocks or mutual funds. Day traders take bigger risks because they buy and sell stocks on margin, so they stand to win or lose much more quickly than other investors do.
They also have a higher risk of getting wiped out because they donâ€™t have any collateral to back up their trades with brokerages.
Options offer another way to invest because they give you leverage. A long call gives you a right, but not an obligation, to buy shares at a specific price on or before a given expiration date. In exchange for that limited risk, you pay a premium upfront and have unlimited potential gains if the stock rises above that strike price.
Option trading can be a great way to make money, but it can also be a great way to lose money. Remember, when you buy an option contract, you are buying the right (but not the obligation) to purchase or sell shares of stock at a specified price on or before a certain date. Don’t go into this investment with anything but understanding that there is a risk involved and you may lose all your money if the market doesn’t behave as expected.