When people think of the stock market, they typically picture a bunch of nicely dressed men and women shouting “buy” in a crowded building. While this may have been a reality in the past, stock market trading has become more accessible to people over the years. Many people manage their own stocks and find unique ways to trade and make money. This includes day trading, swing trading, long-term investing with an IRA, and many others. There is a slightly different strategy though that can really prove lucrative – options trading.
Options trading is a lot different than buying stocks. There is more risk involved; however, options traders often see higher percentages of gains. Because you are investing in the option to buy stocks at a certain price point, you can get started with less money.
Before you start trading options, you will need to understand the difference between a call and a put. A call is the option to buy a share at a certain price point and a put is the option to sell a share at a certain price point. If you think the stock will go up, you want to purchase calls. If you think the stock will go down, you want to purchase puts. Remember, both calls and puts have specific expiration dates, so you will need to sell or execute your options before the specified date.
There are several strategies for successful options trading. Use this guide to learn more about trading strategies. Like all financial advice, it is important to do your own due diligence before taking action. Some strategies that work well for others might not work well for you!
How to Make Money Trading Options
The first step in making money is to conduct detailed research. With options, your goal is to predict the movement of the stock within a short amount of time. While you can hold stock options for weeks or months, it is important to remember that they can depreciate over time. This means you need to have a good idea of what the market is about to do.
Whether you choose to trade options for one stock or several, you will want to find a good, reliable news source. Pay attention to news about your stocks and learn how it will affect shares in the short or long run. If there aren’t any factors affecting your stock that you can see, you will need to use technical analysis to decide how the stock is going to move.
Once you understand how the stock will move and are able to make an accurate prediction, you will need to choose a strategy. There are several trading options strategies that work well for beginners. Just remember that not every strategy is perfect for every situation. It is best to memorize a few different trading methods and strategies so you can react appropriately to the market.
Good Short-Term Options Trading Strategies
As mentioned above, options are available weeks and months before the expiration date. One strategy for successfully trading options is to only focus on the short term. To do this, you need to know how the market is going to react to upcoming news, earnings reports, and other factors. Then, buy your calls and puts accordingly.
A popular method is to study companies around their earnings date. The market reacts to some companies in a certain way every time a new earnings report is made. Traders using this method tend to buy reasonable-looking options with an expiration date close to the earning date a few weeks in advance. Then, they sell a day or so before the report is released.
When to Use Long-Term Options
Long-term options trading can have it’s advantages, but these strategies are typically utilized by people who already have shares of the stock. Holding a put for a long time and waiting for the stock to drop could be a good alternative to shortening your shares. If the stock has a significant drop, the seller would be able to earn some money on their investment and limit their overall losses.
There are several ways to make money when trading options. While options trading is a little more complex than simply buying and selling shares, it can yield a much higher percentage of profit in a shorter amount of time. Depending on your outlook on the stock, there are several strategies and methods you can use.