Trading stocks can be exciting and potentially lucrative. That said, there’s nothing like the massive profit potential and unparalleled excitement trading stock options can offer you.
In fact, in just the past few months, I’ve provided my readers with a number of opportunities to cash in on fast-moving, high-flying trades — ones that produced gains of over 300% in as little as a few weeks' time.
- 295% on Starbucks Corp. (NASDAQ: SBUX) in four weeks
- 207% on Chevron Corp (NYSE: CVX) in 10 days
- 128% on Taiwan Semiconductor Co. (NYSE: TSM) in three weeks
- 186% on Taiwan Semiconductor Co. (NYSE: TSM) in 11 days
- 94% on the VanEck Vectors Semiconductor ETF (SMH) in four days
These gains' frequency and magnitude are exactly why so many everyday investors are turning to the options market for outsized returns.
Beyond the incredible income-earning potential, trading options also has other advantages.
For one thing, options can help you protect the investments you already have. For example, let’s say you own a large position in a company but you have strong concerns this company is due for a 10% correction. With options, you can protect that position by buying put options on that same company. This is what traders call “buying insurance.”
Some traders use options to hedge their risk, a practice similar to “buying insurance.” For example, if you’re concerned the greater market will drop, you can hedge against this and protect the assets in your portfolio by buying put options on index funds such as the Nasdaq or S&P 500.
The most common way folks use options, however, is to speculate on stocks.
For just a little money — usually only a few hundred bucks — bullish investors can leverage themselves into trade positions where they can control a lot of stocks with minimal risk... all while giving themselves a great chance to cash in for upward of 200%, 300%, 400%, or more in returns, whether it’s a bull, bear, or sideways market!
That’s why I find it shocking so many investors are still sitting on the sidelines, unsure if options trading is right for them.
Unjustified fear of unlimited risks, the speed of these trades, and the unfamiliar terminology associated with options trading still seem to be major deterrents for many people who otherwise could be making a lot of money trading options.
Not to worry...
If you want to trade options but are still unsure how to do it and do it successfully, this report is for you.
With the information I provide today, you’ll be ready to start trading options with confidence in no time at all. Let’s get started.
There’s Nothing “New” About Trading Options
Trading options isn’t a new idea. Investors have traded options for thousands of years. The first recorded options contracts were created by the Greeks to earn extra income during the olive harvest. In London, options trading began in the early 1870s. Here in the U.S., thanks to Russell Sage, investors have traded options contracts since 1872.
That said, most Main Street investors have steered clear of this exciting and lucrative market. Only recently has options trading become popular with everyday traders.
A report from Business Insider notes:
In 2020, options trading reached a record level: 7.47 billion contracts were traded, according to the Options Clearing Corporation.
The good news is with the proper, quality information, you can join in on the options profit party too — as soon as today!
Opening an Options Account
Just like with stocks, you need a broker and brokerage account to trade options.
Some of the more common ones include TD Ameritrade, E-Trade, Fidelity, Ally, TradeStation, Charles Schwab, and Vanguard. However, I recommend using the same broker that you use for your regular stock investments. It’s just easier that way.
The benefits to using the services your broker provides include being able to call them with the options trade you want to make and having them process it for you. This takes a lot of the confusion out of trading and ensures you are always in the right investment. Top brokerage firms will have a host of representatives eager to answer your questions and help you make the right options trade.
Just keep in mind that trading options often requires your broker to approve you for margin trading. This will require you to sign a margin agreement with your broker. This is similar to a credit check you would do when getting a loan from a bank. It’s to ensure you have the financial resources to cover your trades if you begin to trade on margin.
To get started, simply call your current broker and tell them you want to be approved to trade options (if you aren’t already). Your broker will get you set up from there.
Additionally, your broker may send you a questionnaire asking a number of trading-specific questions. This “quiz” is a safety precaution. It ensures that you have the basic market knowledge to trade options. Once this “options agreement” is completed, you are assigned an “options trading” level, typically ranging from Level 1 (low-risk basic strategies) to Level 5 (high-risk, leveraged strategies).
Now that you’re approved to trade, let’s go over the basic terminology and concepts you’ll need to know to make your first successful options trade.
Options Trading Explained
A stock option is a contract that gives an investor the right (but not the obligation) to buy or sell an underlying security (stock, ETF, or index fund) at a predetermined price up to a certain period of time.
But first, here are a few important notes and definitions you need to understand before we can begin trading options with success:
- Options are derivative trades, meaning an option’s value is derived from the value of the underlying stock or other security (be it a stock, ETF, or index fund).
- One options contract represents the right to control 100 shares of the underlying stock. You must know this in order to calculate the premium on the options contract and potential profitability of our trade.
- The expiration date of an option is the final date at which the owner of the options contract can exercise their right to buy or sell.
- The premium is the cost you pay to own one options contract. Most options pricing is listed online on a per share basis. That’s why traders often say things like "This option is trading for the low price of $0.50.” What they don’t tell you is that’s not the actual price of the options contract, aka the premium paid. Because options contracts control 100 shares, that $0.50-per-share cost actually means the total cost (your premium) is $50 per contract. Moreover, to calculate your total profits, you must subtract the premium cost from your earnings on each trade.
- The strike price is the price the option’s underlying security needs to reach in order for your trade to be successful (although there are exceptions to this with more complex strategies).
- An option chain is all the available options (at different strike prices) you could buy or sell for a specific expiration date.
- Saying an option is “in the money” means the underlying stock price is higher than your strike price.
- Saying an option is “at the money” means the underlying stock price is the same as the strike price.
- Saying an option is “out of the money” means the underlying stock is below the strike price.
***REMEMBER: When buying and selling options, you’re not buying or selling the underlying security — you are buying or selling the “right to buy or sell” that security at a later date.***
When trading options, one of the most important concepts to master is the idea of a “derivative trade.” As we mentioned above, an options contract's value is derived from the underlying asset.
As such, in most cases, the value of an options contract moves in the same direction as its underlying security. This is a key concept to successfully trading options.
Here’s an example from a recent 207% win my readers cashed in on by trading Chevron Corp. (NYSE: CVX) options in October.
Credit: Yahoo Finance
As you can see in the two charts above, the options contract price on the left closely mirrors the actual stock price of CVX over the same time frame. This correlation is the key concept to trading options.
This correlation between the stock price and options price also guides our decision making as to what types of options contracts to buy or sell. If we’re bullish on a stock and believe it will go up in price, we can buy “call options.” If we’re bearish on a stock, we can buy and sell “put options.”
The difference between the two is pretty straightforward.
Call Options Versus Put Options
A call option is an options contract that gives the investor the right (but not the obligation) to buy a stock or other security at a certain price by a specific period of time. A call buyer profits when the underlying asset increases in price.
For example, if I believe Stock XYZ, which currently trades for $35, will rise to $45 in a short period of time — say, two months — I would buy the Stock XYZ $40 call options that expire two months from my purchase date. For this example,we’ll say the cost of this option is $1.50 per share, for a total premium of $150 total per contract.
***REMEMBER: Each options contract is the right to control 100 shares of the underlying security.***
If during those two months, Stock XYZ reaches $45, I can “call back” the stock and receive those 100 shares at the contracted price of $40 and then immediately sell those shares at the market price of $45 for a nice flash profit. In total, your profits would be (earnings per share x 100) - premium paid, or ($5 x 100) - $150 = $350.
In contrast, put options are options contracts that traders buy and sell when they’re bearish on an underlying stock or other security. A put option gives the holder the right (but not the obligation) to sell a specified amount of an underlying security at a specific price within a specified time frame.
For example, say Stock ABC is trading for $40 a share and you believe the price will decline from there. Puts with a strike price of $40 are available for a $3 premium and expire in two months. Buying a put option in this case would give you the right to sell at your strike price of $40 within those three months, even if the stock price falls below that amount — which you’re hoping it will.
Assuming the underlying stock falls as predicted to $30, your earnings would be $10 per share, or $1,000 total. Your total profits would be total earnings less the premium paid ($300 in this example) for a total profit of $700.
Not too bad for a trade you're in for only two months! And those are only two of the many bull and bear strategies you could employ as an options trader.
That’s all the more reason why options trading is garnering massive intrigue from retail investors. Not only are there numerous ways to make money, whether the market is up, down or trending sideways, but the entry costs to own 100 shares of expensive companies are surprisingly low when compared with owning these same companies outright.
For example, it would cost me around $320,000 to own 100 shares of Amazon.com Inc. (NASDAQ: AMZN) right now. But if I were bullish on the stock and thought shares would hit $3,400 in a few months, I could buy AMZN calls with a $3,400 strike price expiring in a few months for a much more reasonable premium of $5,900. Then I would control 100 shares of AMZN until my contract expires.
That's the true beauty of options trading.
You can claim stakes in expensive, high-volume stocks and trade them for minimal costs upfront while still locking in big-time profits — all in a relatively short amount of time.
But those are only two very basic strategies you could use to start earning stacks of cash in a flash.
In my next report, we’ll dive a bit deeper into the options market and discuss making leveraged trades. Most importantly, I’ll reveal how my Flash Cash Options could help you score big in the fast-moving, highly lucrative options market — all in as little as a few days.