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Over the past few months, most individuals have been stuck at home and isolating due to the pandemic – many without a job or getting paid a fraction of what they would normally make.
This has forced some into picking up other jobs like cashiers and delivery drivers. Others have looked for more creative solutions for their money problems, like starting businesses or trading stock options online.
For those who have started online options trading, you have probably noticed how easy it is to lose it all. On the other hand, some traders have done really well, like the options trader who generated a 1,300% return in a matter of minutes.
Making money trading options is possible, but it takes discipline and plenty of hard work. Keep reading to discover how to actually make money day trading options.
Online Options Trading: Getting Started
To understand how to make money trading options online, it’s first essential to understand what options are and how they work. Options are derivatives of stocks, meaning the price is derived from the price of the stock with added components being factored in.
Buying (or selling) options gives the purchaser the power to buy (or sell) a particular stock at an agreed-upon price at a certain pre-determined date. The price upon which you agreed is referred to as the strike price.
Stock options are sold in contracts – one contract is equivalent to 100 shares of stock. The two different types of options are:
- Calls
- Puts
Purchasing calls gives the buyer the right to buy a certain stock, while a put option gives the purchaser the right to sell the stock.
Individuals will purchase stock options for a number of reasons, not just for trading. People will also purchase options to
- Hedge a position
- Speculate
- For growth
Stock options can help individuals protect their existing positions from intense stock market corrections and can also be used to speculate on specific stocks.
Should You Be Buying or Selling Options
Many amateur stock options traders believe the only way to make money is from buying options, but selling them can be just as profitable, if not more. Typically, people will buy call options in anticipation of a stock increasing in price and buy a put option when anticipating a stock will decline in price.
However, this isn’t the only way that options traders make money. In fact, some investors make a living selling (writing) options. According to a study from the Chicago Board Options Exchange, the majority of stock options expire worthlessly. So why would you want to buy options?
Buying options can be very profitable as well, but the timing needs to be right, and that’s the hardest part of trading options. It is a well-known fact among traders that it is nearly impossible to time the market, but it’s not entirely impossible.
Buying a Call Option
Buying call options is the most popular and straightforward way of trading options. Investors will buy calls with the anticipation that the stock will increase in value within their pre-determined time frame.
For example, you believe Apple’s share price will increase for several reasons: New iPhone release, higher wearables sales, the overall economy is picking up, so you decide you want to buy a call option. Apple’s stock price is trading around $115, so you decide to select the $120 strike price in anticipation that it will stay above the strike.
When buying options, you must pay a premium for the right to hold the contract. The premium will increase the further dated out the strike price is. So, you decide to purchase the option that expires a year from now to give yourself enough time.
The premium for this is $15, and options must be bought in 100 share blocks, so the premium total equals $1,500. Now, suppose a few weeks go by, and Apple’s shares are trading around $122, you have a decision on your hands. You can either sell the contract and collect the premium or wait for the expiration.
Buying a Put Option
A put option can be considered the opposite of a call option and is typically bought with the anticipation the stock will decrease in value.
For example, say you believe Apple’s share price will decrease for a number of reasons: the stock is overbought, no new product releases, the overall economy seems to be unstable. Again, Apple’s share price is hovering around $115, so this time you decide to buy a put option with a $110 strike price.
You still have to pay a premium for purchasing a put option, but this time Apple’s earnings are only a few days away, and investors are expecting a big swing in share price, so it bumps up the implied volatility (IV). When volatility is higher in anticipation of an event or catalyst, the premium will compensate and be worth more.
Options Trading Strategies
No matter what option you decide to trade, it’s important to have a plan. Having a plan will keep you disciplined as a trader and will prevent you from becoming emotionally involved.
An options trading strategy should consist of:
- An entry point
- An exit point
- Stop-loss
- And your target
Having these details set in stone will allow you to focus on the trade and not have to worry about making split-second decisions. You know why you got into the trade in the first place and don’t need to make panic decisions. Online brokerages make having an options strategy easier by providing tools to allow you to control the trade and set your targets before even placing the order.
If you don’t feel comfortable trading options quite yet, consider taking an online options trading course. Another option is to start paper trading, which simulates what a trade would feel like without putting your own money on the line.
Ready to Get Started Trading Options?
Trading options is one of the most exhilarating experiences. It is extremely fast-paced and requires a high amount of detail. The pros will tell you the same – it takes a lot of dedication and hard work to succeed in online options trading.
To learn more about options trading, check out the rest of our website!
