I spent a few months reading up on it to understand some basic concepts. Once I felt I knew just enough to ask some not completely retarded questions, I emailed Suzy. For the next two years, I read through some pretty heavy and dry material while taking extensive notes. Although I started to understand some of the theories, I had trouble picturing them in action. Unfortunately, when you work at a bank, the compliance department attempts to prevent you from doing anything meaningful with your life, including trading options.
For the first time since I started in finance, I was free to log in to my brokerage account and trade whatever the hell I wanted. I had signed up for a newsletter that Suzy suggested, which provides regular trade ideas. That was perfect as it provided a framework to follow. Despite my career in trading stocks, options trading was completely new.
Everything about it looked different. If stocks are two dimensional with just a simple bid and offer, trading options was like entering the fourth dimension.
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There were bids and offers for each specific price point, each at varying expiration dates. And it even becomes fun. What surprised me was how much I loved hitting the freakin buttons again! And making money from home was surreal after being shackled to an office for the last decade. Options trading makes me think of the magnetic toy blocks my kids play with.
The Basics of Options Profitability
What I mean is, there are endless combinations of strategies you can set up depending on your view of the market. And if you think the market is in a downtrend, just use those strategies! And these strategies have some pretty cool names: iron condor, bull call spread, calendar straddle, and iron butterfly. You can think of it as an insurance policy.
All we need to do is place a sell order on an options exchange. What threw me off initially was learning how trading options for income is no different from being an insurance salesman. Many options traders consider themselves to be in the insurance industry.
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The central premise from the author is how an options trader is a one-person insurance company, operating a solo business. Options, like insurance policies, have a contract period. They can range anywhere from a week to multiple years until the policy expires. The way to make a consistent income is to be selling the options contracts rather than buying them. The strategy that has become the bread and butter of what I do is called a credit put spread.
I then use a small portion of that premium received to buy a re-insurance policy for myself to sell out of those shares at an even lower price. Unlike trading stocks where you need the price to go up to profit, I make money if the stock price rises, stays the same, or goes lower by not too much. All rolling means is pushing forward the period of the options expiration date further out in time.
You achieve this by buying back the options contract you sold and then selling another contract in the same name, further out in time. The beauty is you even earn extra income while doing it. Of course, the market tanked, and the trade was underwater. I, therefore, kept rolling the trade further out in time until the price recovered. The reason for the increased profit was because as the share price dropped, volatility had a massive spike. And when volatility is higher, the premium received for selling options increases. The above is a chart of the name during the period I had the trade on.
And I only trade options in these stocks. The reason is simple.
Example of Call Options Trading:
In the example above with the Semiconductor ETF, I decided to start a position in the name because I believe in the increasing demand for semiconductor chips in computers and smartphones globally. As the pandemic spread, the stock price took a nosedive along with the rest of the market. But it was quick to recover and even hit new highs as the world needed more semiconductors to keep pace with their newfound love of gaming and tiger king.
April and May of this year are write-offs because I was inactive. I hid under the blanket as the market was in free fall. My only activity was rolling existing positions further out in time. Excluding those two months, my average return on capital at risk was 1. I would close the existing trades before entering the new trades, and thus, recycle the same capital. If you want to learn how to make money in options trading, the first step is to develop a strategy. There are two main types of options, call options and put options. Both are a type of contract. These option contracts involve two parties, the option holder buyer and the option issuer seller.
Simply stated, call options afford the right to buy, and put options afford the right to sell, the underlying shares at a predetermined price the strike. So, a call option gives the option holder the right to buy shares at the strike price within a determined period of time. A put option gives the option holder the right to sell shares at the strike price within a set period of time. So, in the simplest terms, an investor thinks the value of the shares will rise, they buy call options. If they think the value will fall, they buy put options. Want to learn how to make money trading call options?
Once the investor has purchased this call option, there are a few different ways things could play out. As with most trading, there is some risk involved when it comes to purchasing call options. When thinking over your call option strategy, consider that the potential for gain is much greater than the potential for loss. There is certainly money to be made in this practice. Understanding options trading is the only way you can make more money with this type of market play. Can more money be made with options trading than traditionally trading shares?
That depends on your strategy.
7 ways Canadian stock options will cost you money
This is the time to get in the game. But, could that return be even higher?
You are not, however, obligated to purchase those shares. So, can you receive greater returns with options compared to simply buying shares? Yes, yes you can. Not only can you make more money with options trading, but you can also put less capital at risk. Simply put, you can never lose more than what you originally paid for the call option contract, no matter how far the value of the stock may drop. Standard equity and index option contracts in the United States expire on the third Friday of that month. As the stock market continues to adapt to the popularity of these contracts, though, more stocks are offering options contracts with weekly expiration dates for a quicker turn-around.
These contracts expire on Friday each week. So, while the profit potential on a bought call is theoretically unlimited to the upside, downside risk is capped out of the gate.