How to Make Money with Option Trading
Options trading involves the buying or selling of a financial instrument, stock, commodity, or index. Seasoned investors generally use options as a hedge against long-term positions, whereas day traders leverage the extra trading power to amass profits quickly. To learn how you can gain financial freedom through options trading, our guide shares what you need to know.
How Do Options Work?
Options trading is sometimes referred to as options contracts. They are called contracts because option positions must be active for a predetermined period (generally between 2 weeks to 12 months), thereby fulfilling the buy or sell for that set time. Options occur between two parties and can vary in potency.
For instance, with stock trading, options include tapping into your trading platform’s borrowing power. As a result, your single contract covers 100 shares worth of underlying stock. Other forms of options trading include financial instruments like commodities, indices, currency pairs, and cryptocurrencies, which often are structured as derivative-based financial instruments. Unlike stock options, options trading with financial instruments doesn’t render additional buying power (unless you use leverage with currency pair trading).
Option Trading Approaches
Traders without technical trade knowledge often leverage sentimental analysis or subscribe to a professional trading service to acquire a better investment prediction. Fundamental analysis is another route traders can leverage as it doesn’t require technical knowledge but rather an above-average grasp of what’s trending in the financial markets. For traders with technical analysis experience, these three strategies are highly accurate.
- Covered Call – One of the most popular option trading strategies because it mitigates risk while generating income.
- Married Put – Involves buying assets, like stocks, while simultaneously executing put options on the same quantity of shares.
- Straddles – Includes the simultaneous buying and selling of a put option with the same entry rate and expiration date.
Learn more regarding the above strategies at Investopedia.
Like any form of investing, options trading involves risk. If you don’t have the equity, leverage options at your own risk as they are known to magnify both profits and losses (with stock options). For experienced traders low on capital, options trading is a high-powered way to quickly beef up your trading account. To learn how to make more money online through investing, visit our Investing page.