Learning how to make money trading options is a skill just as necessary as investing itself. It takes a great part of the stock market, which is making your money make you money, and amplifies it tenfold.
But trading options is a skill that takes time to learn. Not realizing what you are getting into can easily lead to being in debt and out of money.
Here’s how to make money trading options and minimize your potential loss.
Options are a contract between you and a company of the right (but not obligation) to buy 100 shares of their stock by a specified point. This period of time is set up before the contract is placed, and can range from one week to six months.
When you decide to place a contract, you place a 10% premium. If a stock is currently trading at $20, and you ask for a contract, you must place $200 dollars down. Whether you decide to execute the contract or let it expire, once this money is paid, it does not get returned.
For those looking into a more in-depth explanation of “what are options“, click the link to get example strategies and how to maximize your returns.
Buying a Call
The main reason people get into buying and selling options is the amazing amounts of profit that can come from it. There are two main ways to make money from options trading.
The first way is to buy a call. A call is an instance where you think a stock will go up in price anytime over the next week to years. You agree to a contract for stock 123 at $100 dollars a share. You put your initial 10% down, being $1000, and then see what happens over the next 3 months.
Let’s say in a week, company 123 announces they have fixed world hunger, and their shares rise to $200 per share. You agreed to only pay the $100 per share, which you do and you spend $10,000 rather than having to pay $20,000. You have now doubled in profit.
Selling a Call
The other way to maximize returns is to sell a call. This is meant for those who have the shares to provide for a contract.
For instance, if you had 100 shares of company 123, you could look into seeing what the call options are. If your shares are currently trading at $100 and you don’t see them rising above $120, then you can buy an option. If the option is set at 10% a share for $120, then you can sell the call and collect the premium immediately.
Be aware, once the contract sells, there is no going back. This means if the stock rises above $120, you will have lost out on the possible gains.
How to Make Money Trading Options: Key Takeaways
The key takeaway of learning how to make money trading options is there is research required for trading options. Don’t just go following the hype of stocks and end up burnt and out of money. Find the stocks you can trust will make moves, and make your strategy based on these assumptions.
For those looking to learn more about investing and making the most out of your money, be sure to check out our other articles. If you know an investor who is ready to take their game to the next level, feel free to share this article with them.