How To Make Money In Option Trading

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How To Make Money In Option Trading – In this section, we’ll explore three options strategies that investors often turn to, based on their portfolio needs and what they think will happen to a particular stock’s price.

Options contracts have a limited shelf life, typically trading in short periods such as 30, 60 or 90 days, so keep in mind that your strategy may have some time to work.

How To Make Money In Option Trading

How To Make Money In Option Trading

Let’s decode an example of a call option. When looking for a call option on a stock, you’ll see something like this:

How To Make Money Trading Options

Suppose company ABC is trading at $10 per share. You believe that the stock price will rise in the near term, but you do not want to buy the stock. You can buy call options. Typically, options are priced at a fraction of the actual stock price.

You decide to buy a call option contract on Company ABC with a strike price of $10. It will expire in 90 days. (1 option contract = 100 ABC shares)

A call option costs $2 (also known as premium) for one contract. This means you will pay $200 ($2 premium x 1 contract x 100 shares). You now have the right to buy 100 ABC shares at $10 until the option contract expires — regardless of the actual price of the stock.

Let’s decode the defensive put options strategy. When considering buying a stock top protect put option you own, you may see something like this:

Put Options With Examples Of Long, Short, Buy, And Sell

Suppose company ABC is trading at $10 per share. You think the share price is going to go down in the near term. You own stock, but don’t want to sell it. You can buy a put option, also known as a protective put.

You decide to buy a put option contract on company ABC with a strike price of $10. It will expire in 90 days. (1 option contract = 100 ABC shares)

A put option costs $2 (also known as premium) for one contract. This means you will pay $200 ($2 premium x 1 contract x 100 shares). You now have the right to sell 100 ABC shares at $10 until the option contract expires — regardless of the actual price of the stock.

How To Make Money In Option Trading

Let’s decode covered calls. When looking for put call options to generate income on stocks you own, you might see something like:

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Suppose ABC stock is trading at $9 per share. You believe the price won’t move much in the near term, but you want to earn some income on it. You can sell (write) a covered call option.

You decide to sell a call option contract on company ABC with a strike price of $10. It will expire in 90 days. (1 option contract = 100 ABC shares)

The call option premium is $2 per contract, so you would collect $200 ($2 premium x 1 contract x 100 shares) for selling it. In return, if the buyer ever exercises the contract until the contract expires, you are obligated to sell 100 ABC shares at $10 – regardless of the stock’s actual price.

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How To Make Money In Option Trading

Inspired Investor brings you personal stories, timely information and expert insight to empower your investment decisions. Visit About Us to learn more. Option trading without knowledge is a game of chance; Most new investors lose money in options. Before venturing into options trading, one must familiarize oneself with the basics.

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One should try to learn some of the commonly used jargons and their meanings in the options.

The derivatives segment accounts for more than 97% of the daily turnover in the Indian market with options.

As market awareness among investors increases, retail participation in the derivatives segment such as options trading has increased.

The main reason is the high potential returns and low margin requirements, however, option trading carries high risk.

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(1) Funding required: The shelf life of options is mostly one month so one should not use full amount at any time. It would be advisable to allocate around 5-10% of the total capital to a particular trade.

(2) Evaluate option trades: As a general rule, traders should decide how much risk they are willing to take. That means having an exit plan. One needs to choose the upside exit point and downside exit point in advance. Trading with a plan helps one establish more successful trading patterns and keeps one’s worries under control.

(3) Acquire knowledge: One should try to learn some of the commonly used terms and their meanings in the options.

How To Make Money In Option Trading

This will not only help in getting maximum benefits from options trading but also in determining the right strategy and market timing. It is possible to learn as you go, increasing both your knowledge and experience at the same time.

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(4) Avoid trading in illiquid stocks: Liquidity is very important as it allows one to enter and exit trades more easily.

(5) Define holding period: Time decay plays an important role in options pricing. Each passing day reduces the value of your options. Therefore, one must cover the position on time irrespective of the position profit or loss.

Like stock trading, options trading involves buying and selling call or put options. Buying an option requires a small financial investment with limited risk, i.e. up to the premium paid, while as an option seller, one takes a contrarian view of the market.

The risk assumed when put options are unrestricted is that there may be a loss if the underlying share price falls significantly below the original investment or goes to zero.

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2. Timing works against the option buyer and in favor of the option seller. Therefore, buying options close to expiration is not a good idea.

3. Volatility is an essential factor in determining the value of an option. Hence it is advisable to buy options when market volatility is expected to increase and to sell options when volatility is expected to decrease.

4. It is always better to be on call options instead of buying ahead of important events or significant geopolitical risks.

How To Make Money In Option Trading

Options trading has the potential to yield multiple returns if practiced properly. One must dedicate valuable time to learning and educating oneself about the approaches that work best.

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Disclaimer: The opinions and recommendations expressed in this article are those of the analyst. These do not represent their views. Traders often jump into trading options with little understanding of the options strategies available to them. There are many option strategies that both limit risk and maximize returns. With a little effort, traders can learn how to take advantage of the flexibility and power that stock options can provide. Here are 10 options strategies that every investor should know.

With calls, one strategy is to buy uncapped call options. You can also make a basic covered collarby-right. This is a very popular strategy because it generates income and reduces the risk of only holding the stock long. The trade-off is that you must be willing to sell your shares at a set price – the short strike price. To execute the strategy, you buy the underlying stock as usual and write—or sell—call options on those same shares.

For example, suppose an investor is exercising a call option on a stock that represents 100 shares per call option. For every 100 shares of stock an investor buys, they will simultaneously sell one call option. This strategy is referred to as a covered call because, in

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