There are many different ways to make a profit through investing. Hence, not surprisingly, many people wonder whether options trading is a profitable option, given their individual trading style. When one uses the right strategy and has some experience in the financial markets, he/she can quickly turn a profit with trading options.
Options trading is profitable because it uses leverage. Beginners can make a profit with options trading once they know basic strategies for profit, understand how to make trades, and understand premiums. Advanced techniques can be gradually learned to make higher profits at lower risks.
Many newbies don’t understand all the aspects of options trading, making it harder for them to make money. We recommend that you study options before you make your first trade and continue reading as we talk about options trading and more. Doing so will help you take the first step towards making a profit with options trading!
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
Why Is Options Trading Profitable?
Options trading is profitable because options use leverage. Instead of buying you a piece of a company like a share, an option is a contract that gives out the right to buy and sell. You can use options to control larger trading positions and play the stock market, even if you don’t have many funds available to trade in the beginning.
With leverage, you gain more in profit while spending less money. For instance, an option contract can represent 100 shares of stock. You can make a profit whether you buy or sell an option, allowing you to use several different profitable trading strategies in this space.
Options and Profitability
Each option contract comes with a profit and loss profile. You can use these profiles to determine how much money is potentially made or lost on the trade. When you sell, you need to understand that the maximum profit is the price of the premium. However, you can still make even more profit by playing the upside, which has an unlimited profit range.
If you buy a call option, you will profit if the underlying stock rises before the option contract expires above the strike price. Whereas, if you purchased a put option, you benefit if the stock price falls below the strike price before the expiration date.
The exact profit you make depends on the difference in the stock price and the strike price when you close the option.
Profiting From Trading Options
Options traders can make a profit whether they buy or sell. When they position their trades strategically, they can make money, no matter how volatile the market is. Different factors impact the price and premium you pay, which may lead to additional profits.
While some people enjoy the excitement that comes with trading, you will want to step back and evaluate the market before you trade. You don’t want to take too many risks when trying to make money.
The best way to profit is to stick with your plan. Start by determining your goal before you buy the option. Then, when the option hits your profit goal, immediately trade. You want to stick with your plan, even if it is very early in the contract.
Many options traders feel tempted to hold on longer to try to make a more significant profit. However, waiting too long could cause you to lose a good opportunity. It is best to sell when you reach a profit goal. If the option never reaches it, you want to trade somewhere close to the goal.
Understand Market Trends To Increase Profits and Avoid Losses
Many new traders try options trading and feel discouraged after a considerable loss, leading many to believe that options are risky. However, all too often, new traders jump in with doing research, which can lead to these severe losses.
Being familiar with market trends will help you succeed, and you should avoid making any rash choices without considering the market. The more you know, the more solid a strategy you can use, and the more you’ll stand to make in profits.
If you are a beginner, the Trading Bible collection by Alexander Taylor can help you understand options, the stock market, futures, and more. The collection focuses on using investment profits to make a living income.
Differences in Buying and Writing
Whether you decide to be a buyer or a writer (seller) can also impact your profit. You will want to consider how you think the stock will move before you buy.
Option Buying
An option buyer can make significant profits on an investment when the trade works outright. When buying, you want the stock price to move above the strike price. If it moves substantially over the strike price (in the case of a call option), you will want to sell.
Option Writing or Selling
Option writers make smaller profits when the option trade has a higher return. You are limited to the premium amount, no matter how much the stock moves. However, there are more reasons to be a writer than a buyer.
The writer has better odds in their favor. When you write a call, you can profit if the stock stays under the strike price. For puts, you benefit if the price remains above the strike price. Options writers can make profits when they hold an option until it expires, too, to use the right strategy.
Options Trading Strategies for Profit
You will need to be familiar with the basic strategies to learn how to turn a profit. There are four basic strategies, but you can make them much more complex by using calls and puts together. Here are the strategies to start learning first:
Buying Calls
Buying a call is the most basic option strategy. It is usually low-risk, as the loss is limited to the premium you have paid. However, the potential profits are limitless. With this strategy, it is best to use only small portions of your capital since the option will become worthless if it expires.
Buying Puts
Puts are suitable for hedging the risks that you’re taking in your portfolio. The chances of making a profit are slightly lower than buying a call. You will need to follow the market carefully while building your strategy to avoid heavy losses.
Writing or Selling Calls
There are two types of call writing: covered and naked. Covered calls have less risk than a naked call and can earn additional funds from what you have in your portfolio. When covering a call, you are writing on stocks already in your portfolio.
Naked calls are similar to a short sale, meaning they have an unlimited loss potential. Expert options traders know how to turn this into potential profits.
Writing or Selling Puts
Put writing is a strategy for more experienced options traders. The best reward is that you keep the option premium, but the worst loss is that you have to buy the stock. In other words, you can earn the premium at most, but the loss maximum is much higher.
Still, this is a strategy worth looking into, because once you learn to navigate writing puts, the odds of turning a profit are extremely high.
Understanding option prices will help you determine what type of strategy to use. The following video breaks down options pricing nicely:
Author’s Recommendations: Top Trading and Investment Resources To Consider
Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.
- Roadmap to Becoming a Consistently Profitable Trader: I surveyed 5000+ traders (and interviewed 50+ profitable traders) to create the best possible step by step trading guide for you. Read my article: ‘7 Proven Steps To Profitable Trading’ to learn about my findings from surveying 5000+ traders, and to learn how these learnings can be leveraged to your advantage.
- Best Broker For Trading Success: I reviewed 15+ brokers and discussed my findings with 50+ consistently profitable traders. Post all that assessment, the best all round broker that our collective minds picked was M1 Finance. If you are looking to open a brokerage account, choose M1 Finance. You just cannot go wrong with it! Click Here To Sign Up for M1 Finance Today!
- Best Trading Courses You Can Take For Free (or at extremely low cost): I reviewed 30+ trading courses to recommend you the best resource, and found Trading Strategies in Emerging Markets Specialization on Coursera to beat every other course on the market. Plus, if you complete this course within 7 days, it will cost you nothing and will be absolutely free! Click Here To Sign Up Today! (If you don’t find this course valuable, you can cancel anytime within the 7 days trial period and pay nothing.)
- Best Passive Investment Platform For Exponential (Potentially) Returns: By enabling passive investments into a Bitcoin ETF, Acorns gives you the best opportunity to make exponential returns on your passive investments. Plus, Acorns is currently offering a $15 bonus for simply singing up to their platform – so that is one opportunity you don’t want to miss! (assuming you are interested in this platform). Click Here To Get $15 Bonus By Signing Up For Acorns Today! (It will take you less than 5 mins to sign up, and it is totally worth it.)
Conclusion
Options trading is profitable as long as you understand how to make trades. You will want to consider the market and know all of the basic strategies for options trading. Once you are familiar with the basics, you can move onto more advanced techniques to make better profits.
If you want to learn more about options trading, be sure that you check out the rest of my posts. I have plenty of helpful information that you will want to read!
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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