Make Money Trading Options

Trading options is both similar to and different from trading stocks. There are many ways to make money trading stocks from going long to day trading.In this regard,options and stock trading, are similar.

The starting point for learning options trading is knowing the difference between an option and a stock. An option is merely the right to purchase a particular stock at a specific price over a specific period of time.Since we’re talking about stock prices here, there is volatility in their value over the option expiration interval.

Options, however,since they expire on a specific date, have to be exercised before that date. And there’s no rule saying you have to exercise your option if you choose not to. Plus, you can purchase an option for a fraction of the actual price of the stock.Options traders can leverage their investment by being able to trade more stocks.They can acquire the option to buy a $100 stock for only a fraction of that price.Hence, they can acquire options for more stocks than if they were actually purchasing the stocks outright.This leverage makes options very attractive as an investment.

There are different types of options,too. You can exercise an American option any time up to and including the expiration date, but European options can only be exercised on the expiration date.And just to complicate matters, where you purchase the option has nothing to do with it’s being American or European.The “American” options tend to apply to stocks and bonds, while the “European” type applies more often to indexes. And options expire on the Saturday after the third Friday of the month. But U.S. Since markets are closed in the U.S, on weekends,American options expire on the third Friday of each month and European options the Saturday after the third Friday.

An option is the right to either buy a stock (”call” option) or sell a stock (”put” option) either on or before its expiration date.You have several choices when you purchase an option. You can either hold it until its expiration date and exercise it just before it expires, or you can exercise it any time before that date.Or you can sell the option itself before the expiration date and recoup some of your investment. If you don’t exercise the option before it expires, you lose your investment.Let’s look at these situations more closely:

Let’s say you buy an option for Acme Chemicals Corp.for $2 a share with a strike price of $20. Now most options contracts require a minimum purchase of 100 shares, so you’d have to pay $200 (for 100 shares) for the contract.Acme’s stock price rises to $25 two weeks later and rather than waiting for the expiration date, you decide to take your profit and run. You exercise your option and buy the stock for $20, then you turn around and and sell right away it for $25.You deduct the  $2-per-share cost of the option and you’re left with a $3 per share profit,or $300 less brokerage fees.Pretty conservative, but you made money.And that’s a good thing!

But consider the opposite scenario. What happens if the Acme’s share price doesn’t rise. What happens if the price of the stock falls below $20? If you sold your options for half of what they cost you, in this example,you’d only be out $100. Bear in mind that owning an option does not require you to purchase the stock. So you can sell the option and recoup a portion of your investment. This is better than acquiring 100 shares of Acme’s stock outright. You can jump in and exercise the option when you know you will make a profit, or you could wait it out until the expiration date and make your decision then. I personally think the more conservative approach is more likely to result in consistently positive returns, albeit perhaps lower than a more aggressive strategy. But that’s just the way I would do it. The higher the risk, the higher the return. Higher profits. And potentially greater losses.And like other investments.

This is just a simple explanation of how to trade options. It is more complicated than this and you should really educate yourself before you commit much of your capital to it. The best options trading trading tutorial I know is the one taught by David Vallieres, which you can review here and the video above from the free demo video series he provides. I think this course is the best because you’ll not only learn how to trade options, but you’ll also learn how to make money.