One of the interesting ways to make money is by trading stock and share options. I’ve done this personally and there is an opportunity to either make or lose alot of money in a short period of time.
There are different tactics that you can use and apply to make as much money as possible when trading options.
Before you get excited and sign-up to start trading options, there are some things that you should have in mind.
Options can be high risk.
Options contracts are a depreciating asset. The longer you hold onto them, the less valuable the contracts will be.
The second thing is you have a wide pricing spread between what the contracts will be bought and sold for.
If you are going to make money buying and selling options contracts, you must be able to sell those contracts to a buyer for a profit.
If you buy and sell options contracts, expose yourself to market risk.
You won’t have any control or influence over the price of the options contracts and the market price of the shares.
This means the share price performance is influenced by the buying demand of the people in the market. Understanding the motivational factors behind the buyers is important.
This is how you will be able to buy at a certain price point and how you will take profits at a certain price point.
How can you make money buying and selling options contracts?
- Find share options that have a buyers market.
- You need to know that there’s enough trading volume so that you can easily buy and sell options in that market.
- Buy long (3-12 months out) to minimize the time depreciation of the options contract.
- Trade what you can afford. Don’t gamble on anything that you aren’t confident in and that you cannot afford to lose.
- Know the price points that you want to buy and sell at to minimize losses and to take away profits.
You can collect an income by selling options contracts on shares that you own.
This is a safer method. Buy the amount of shares needed so that you can write an options contract. (In the US, it is 100 shares. In Australia, it is 1000 shares).
You can write an “Out of the money” Call or Put contract and earn the income for the right to sell the shares at that price in the future.
If the contract expires, you keep the income.
You can also collect income by selling options contracts on shares that you don’t own.
Works in the same way as stated above. However, you don’t own the shares and bet that the contract won’t be exercised. If the contract is exercised, you need to buy the shares and then deliver them to the buyer. This may see you earn a loss.
If the contracts aren’t exercised, you keep the income without ever owning the asset.
What are some of the things that you need to consider?
You have to pay a brokerage fee.
In one of my very first options trades, I did the trade through a broker. The broker gave me general advice and didn’t accept any accountability. I took the risk and went through with the trade at 10 AM and then sold the options at 1PM.
I think I used around $2000 as a float and earned about $200 in revenue.
I remember the brokerage and trading fees amounting to around $140. They had taken the bulk of my profit with zero risk. Whereas I had put my money on the line and my skin in the game, but came out with $60 net profit.
On top of that, I would need to pay taxes on my profit.
So when you are trading, you need to consider how much net profit you can make given the amount of risk that you will invest into each trade.
How can you get started?
- Have $3000 to start with as float money.
- Sign-up to an options trading desk.
- Shortlist the share options that have trading volume and good price movements.