Options Trading is all the rage, for good reason: it is possible for the average person to make a nice amount of money on a daily basis given their level of risk. This is largely because Options Trading trading offers an incredible opportunity to trade the equities markets without so much outlay of capital.
Let’s take a look at Options Trading for the complete beginner and see if this is a viable income boost vehicle for you.
What is Options Trading?
An option is a contract that allows (but doesn’t require) an investor to buy or sell an underlying instrument like a security, ETF or even index at a predetermined price over a certain period of time. Buying and selling options is done on the options market, which trades contracts based on securities.
So with Options Trading, you’re not investing in the stock itself, like buying Apple or Netflix stock. Instead, you’re purchasing the right to control the stock at whatever strike price you choose in the anticipation that it will increase or decrease over the select period of time.
The Advantages of Options Trading
There are many advantages to trading Options on a daily basis, including:
High Liquidity. You’re simply trading cash for cash at the current price of the contract for that strike price. Some stock options are more liquid than others so you will want to trade highly liquid options contracts such as NFLX – AAPL – AMD – FB – TSLA – NVDA. These are known as “beta” tickers.
Easy Access. The options trading market is open during normal trading hours every trading day. Anyone with a brokerage account can take a trade with as little as $20.
Quick Money. Day trading in options gives you the opportunity to enter and exit positions quicker and with less risk than other securities, such as stocks and mutual funds. It’s also significantly cheaper to purchase an option than to buy the underlying asset, the shares of the stock, for example.
Market Order: This is simply the execution of your decision to purchase an options contract. You have made an order to purchase an options contract at the current market rates.
Entry Order: While a market order is made at the current market rate, an entry order is only executed if the option contract price reaches a value that you have specified.
Stop-Loss Order: This is a mechanism to limit your losses (or gains). You can specify that your position will be liquidated once your losses (or gains) have reached a certain threshold. For example, you could specify that you want to sell once your underlying asset – the stock like $AAPL hits a certain price level. Most of the time a percentage loss or gain is set for a stop loss or stop order.
Bid: This is the price at which you can buy.
Ask: This is the price at which you can sell.
Why Trade Options?
There are a number of reasons you can make serious money trading options. Even putting financial remuneration to the side, day trading with options appeals for several attractive reasons.
- Low-cost strategy – Day trading in options gives you the opportunity to enter and exit positions quicker and with less risk than other securities, such as stocks and mutual funds. It’s also significantly cheaper to purchase an option than to buy the underlying asset, the shares of the stock, for example. So, you can control the same number of shares with far less capital.
- Diversity – Because options are so much cheaper than buying the actual stock, you can benefit from an increased number of investment opportunities. Your capital will go further, increasing your profit potential.
- Greater benefits – When the stock moves you can benefit even more with an option. Let’s say a stock moves from $25 to $50. That would bring you a 100% gain in shares. However, a call option move from $1 per contract to a $5 contract would bring you a 500% gain. Therefore, you can profit more and in less time with an option.
- Options can succeed where other sectors fail – Whilst some sectors of the market fail, options can succeed. This is partly because you do not need to exercise your option to profit from it. Plus, volatility itself can be profitable.
- Mutually beneficial – Although options are often built on stocks, combine both and they can bring you greater benefits. This is because you can sell your option to create income on the stocks you already own.
Intraday options trading is multi-faceted and brings with it great profit potential. The best part though – accessibility. You can start day trading with options from anywhere in the world. All you need is an internet connection.
All you need is a regular brokerage account like TD Ameritrade.
There are 3 basic types of accounts for those that wish to trade options on a regular bias:
Margin. No need for a margin account to trade long options. Long options are buying puts or calls. With this strategy we are always long even if the ticker price is falling. We wouldn’t recommend a margin account for trading options if you do not have at least $25,000 to avoid what is called the PDT Rule.
Cash. A cash account is highly recommended especially if you are under the PDT rule of less than $25,000 valued account.
Practice Accounts or Paper Trading Accounts
Many brokerages provide practice accounts that allow you to make trades without actually risking any money or making any. It’s a great way to learn Options Trading, but does have one potential downfall.
When you’re trading with a practice account, it’s easy to develop a tendency to take a lot more risk than you would if you were using real money. This can be especially bad if you do extremely well with your practice account, as you might then be too bold when you move on to a real account.
Emotion also comes into play much less with practice accounts; after all, you’re not really risking anything.
Even so, it’s still wise to use a practice account for a while until you understand the basics well enough before risking any real money. It will do you the most good if you take the account seriously – as if it is real money – and use it to work on real-life strategies as you learn the ins and outs of Options Trading.
Options Trading offers a lot of opportunities, even to those with relatively small amounts of money. Real success comes from discipline and understanding the factors that can make options contract values rise and fall.
Now that you have a basic understanding of how Options Trading works, you can develop your skills in this area by researching price action behavior and utilizing a practice account, such as $300.
It will take some time and effort to become comfortable in your skills, but once you learn some profitable techniques, the world of options trading can be your money making playground!
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