Trading in options is a viable route of investment for the more experienced trader who may be searching for a capital-maximizing way to increase their profits and diversify their portfolio. With that being said, it is not just an instant success rate and there are lots of things to think about before you can guarantee that you will see any profit at all. Making real money requires real dedication, and this post discusses the key points to work through.
Get to Know the Craft
Options trading is a craft and there is no sense in denying it. It takes a level of true devotion to the ins and outs of how to trade before you can really see any hope of being successful. So, your first priority, which should sit above everything else you’re trying to do, is to treat it as a craft. This means investing in your knowledge and getting to know where to look for viable information. It is a super smart move to have an options analyst that you lean on and use to enhance your own knowledge as things move forward.
Pick the Right Strategy
There are over a dozen key strategies for options traders to dive into, but picking the best one for what you are doing is a vital component to actually making a profit for your portfolio. There are two top picks below to explore that tend to yield the most viable results when it comes to increasing your capital.
Buying Calls
It is quite easy to see at least 10x the initial premium when buying calls. This is simply because you purchase options at a low price and the potential for them to increase above and beyond what you paid is quite apparent. So, you could buy a call at $40 for a strike price of $400. If this goes up as you predicted, by say double, you will also double your gains.
Buying Puts
Conversely, if you invest in puts, the same logic can be applied. When you buy a put you are making an assumption that the price will fall and therefore you will be able to capitalize on this occurrence. So, if the share price does drop, then you will have made money.
Understand the Risks
Conversely, if you invest in puts, the same logic can be applied. When you buy a put you are making an assumption that the price will fall and therefore you will be able to capitalize on this occurrence. So, if the share price does drop, then you will have made money.
There are No Guarantees
Just like anything in life, you can work hard and research until the cows come home, but you might still see a strategy fall through in an unexpected way. There will never be any 100% locked and loaded guarantees in trading, and this fact may be hard to swallow, but there it is.
The Market is Complex
It is also worth noting that as a trader you are exposed to the complexities of the options trading market. Therefore, your capital is never quite protected from this truth because there is always something to learn, and something is always shifting. The nuances of the options market mean you will be on your toes constantly, and this does not suit every style of investor because it is a high-pressure environment that demands a lot from you.
Getting to Know Volatility Factors
You will never be able to make money if you do not get to know the volatility factors associated with options trading. This will help you determine which strategy should be used, or whether you should just quite literally steer clear of certain derivatives in the investment sphere. Once you understand exactly what volatility means, you will be able to navigate the complexities of options far easier than ever before and this puts you in an advantageous position regarding your potential income prospects.
Striking a Balance
Options are all about striking a balance between what you buy and what you sell. There are four basic concepts to get your head around and these are as follows.
Buying a Call
When you buy a call contract you are essentially securing the opportunity to purchase something at a certain price by a certain date. This gives you plenty of wiggle room and can be a profitable strategy when executed correctly.
Buying a Put
When you purchase a put contract, the inverse is true. This means you are awarded the chance to sell the asset at a price by the expiration date. There is more space to lose money here, but only if you make bad investments led by misinformation and lack of research.
Selling a Call
You could also sell a call which allows you the right to sell a call contract. This means you should be able to mitigate the potential downsides and profit losses by only missing out on the premium that you put upfront at the time of purchase.
Selling a Put
Lastly, if you opt for contract selling, you are agreeing in principle to sell something by a stipulated date at a certain price. You can also lose money here, but the risks are easy enough to navigate if you know what you are doing and implement the right undercutting strategy.
Striving for Diversification
When you combine these strategies with underlying movements, it is possible to diversify your approach to options trades and this is where the real money is made. It takes a lot of insight before you can get to this stage, but experience is the thing that will make it possible. Everyone should explore how they can diversify their game plan and make it align with their overall goal.
Real money, is it a possibility with options? The answer is yes. As long as you figure out how to carry the risk and define your tolerance, anything is possible.
