Want to make money from options trading? Options trading is by far one of the most hardest and complicated side hustle anyone should be doing to make income. It requires a deep level of understanding of the math behind every number, percentage, chart, and decimal. However, if done correctly, options trading can be the most passive way of investing that some might say is better than dividend-paying stocks. That is why there are many so-called expert investors trying to sell you the idea of option trading as sure-make money with minimum risk.
Options trading became widely popular after the Gamestop event in February 2021 where investors such as people on Reddit showed how they turned an initial investment of $53,566 in GameStop call options into a stack of $11.2 million. This sparked many young investors to jump on the bandwagon to start learning how to trade options. However, many soon realize that options trading is not as simple as it seems
At HustleVentureSG, we aim to provide fair and valuable content for free to all. We hope that by sharing what we learned from our past mistakes and our investment philosophy anyone can start learning how to do option trading safely.
How Options Trading works
Options trading has been around since the time that stocks were actively traded. Option contracts provide purchasers the right, but not the responsibility, to buy or sell an underlying asset at a predetermined price and date. Call options and put options form the basis for a wide range of option strategies designed for hedging, income, or speculation.
Traders and investors buy and sell options for several reasons. Options speculation allows a trader to hold a leveraged position in an asset at a lower cost than buying shares of the asset. Investors use options to hedge or reduce the risk exposure of their portfolios.
Back in the day, options were mainly used for the large financial institutes as options require a considerable sum of money and the level of risk involved does not allow most retail investors to trade, however, with the upstart of mobile app brokerages like Robinhood, Tiger Broker, and MooMoo. The trading option has become accessible to the public markets.
What are some Risks of doing Options Trading?
There are a number of risks related to option trading that most investors do not know about because of all the fancy ideas and ads portraying options as being the NO.1 way of making easy money. Options trading carries a number of risks which we will be talking more about it below.
Not enough Understanding
Zerodha founder said in a tweet that 80% of all open buy option positions at the end of every day are in losses. Buying options ruin most retail traders. Because they don’t understand the risk of leverage, averaging down, & impact costs.”
Young investors these days are eager to make a quick buck without learning of the risk and cost involved in the process. These young investors get a lot of their understanding of options from watching Youtube videos of other people’s past successes without mentioning the risk involved.
Not knowing how to manage Leverage
Option investments are usually used as leverage. Leverage allows professionals to be more creative with the money they have to invest. They can use leverage to dramatically boost their purchasing power (and related returns) and perhaps invest in many companies at once with less cash and more debt.
Most beginner investors do not understand or have enough financial knowledge on how to trade options. Even though options can help magnify gains on your investment, they can also magnify losses as well. An incident that happened on Robinhood was an active options trader trading his money saying he had “no clue” on how he invested his money and had piled on too much risk on his investment. The trader on Robinhood ended up killing himself after believing he racked up huge losses.
Greed
Once you start making a few hundred dollars trading options, it’s easy to get carried away. Greed may be quite risky, as novice options traders may overleverage their accounts in the hopes of making a fast buck. The brokering account must be a margin account in order to trade options. Beginner investors frequently make the rookie error of taking on too many option trades, causing overnight excess liquidity to emerge. When the market closes, the user is forced to liquidate their stake.
When should people be using Option to make money
It’s crucial to know when the ideal time is to incorporate options into your investment. Most new investors make the mistake of jumping right in without having adequate financial information or expertise to guide them. Here are some guidelines that any new or aspiring trader should be aware of before getting started.
The most important rule of thumb when trading option is trade option for stock that you are willing to buy or sell.
Large Portfolio
Option trading can be really violate, having the cash to leverage safely is really important. That is why for season investor, having the funds to safely trade a cash secure put or cover call helps to cushion any downside risk. Season investor know that if they are forced to buy or sell a 100 shares of a stock when the option expire, they are prepared for it.
Minimum Risk in Starting
Doing options can be a risky investment when starting out. Which is the reason why you have to weight the pros and con of option trading. Option trading should be a side income only when starting out. Taking low risk investment trade which are nearer to expiration date and far out of the money is a good start.
Only when they don’t mind buying or selling their stocks
Options traders like to trade stocks with high volatility because they provide a bigger premium. However, not all of these investors are ready to earn the premium for the shares. This is the largest error beginner options traders make. Since they are left with a hundred shares that they do not want to hold.
Be willing to lose some
Not all trade will be positive. A win/loss ratio of more than 1.0 or a victory rate of more than 50% is normally considered positive. For all option trader, it is a MUST TO COLLATE ALL TRADES in Excel to understand month to month PnL (Profit and Loss). Additionally, adding a remark section to comment on mistake and lesson is really important to stay focused to learn better.
How to Get Started on Option Trading
Before you even get started on trading your own money on options. It is really critical that you have all the in-and-out about how options trading works.
Do your own Research
We recommend reading Options trading for Dummies, Rich Dad’s guide to investing. These should give a guide on why you should use the option only to hedge and protect your portfolio and how to use it to make minimum risk to earn income.
We usually recommend investors only start using the option when they have reached a sixth figure portfolio. That way they would have lower leverage when buying options.
Download a Broker App
To learn how to use the option, having a broker account for paper trading is crucial. Need a brokerage app, we use Tiger Broker and MooMoo for our investment, click on the link to get product review for both brokerage apps. Then click on the referral link to enjoy free stock or cash voucher when you deposit the minimum amount required.
Read up on how each Brokeraging app works
We can’t stress this hard enough. Knowing the Ins and out of the brokerage, the app makes good options traders. A seasoned option trader is able to understand Market data, calculated and make good analysis decision and act according when the time is right.
Paper Trading
Paper trading doesn’t require any real money and brokerage app usually start you off with $100,000 to practice with. Use this time to practice short and long-term trade for both calls and put to understand how the brokerage app works and how each metric interacts with one another. At some point, the option trader should have a clear understanding on the movement of options. To finally graduation from paper trading, it’s best to achieve an above 60% win rate.
Practise
Don’t be too eager to make your first buck on the stock market. To be a good options trader, there is no need to trade daily or weekly. Oftentimes, the best option trader trade on a monthly basis and let time do its work. During every practice, learning to take more risk is critical to understanding the danger and risk associated with high leverage.
The Problems with Listening to Options Guru
The main problem that Options gurus tend to make is that they always assume that there is only 1 options trading strategy that works only or options trading is easy money. Everyone is a genius in a bull market. If you hear only the positive aspect from these gurus, stay away from them as they are not truthful in helping others learn to trade options safely.
Which Strategy to use in each Scenario
If you buy a call, or you buy a put, your maximum loss is the premium that you paid, and you’re under no obligation to buy or sell. If you sell a call or sell a put, then your maximum gain is the premium, and you must sell if the buyer exercises their option. Here are a few strategies for options investing.
Sell Put
This is when you sell the option to someone else to sell the underlying at a specific price in the future. You are selling the right to sell to someone else when you sell a put. The premium for the option represents the upward potential, while the stock represents the downside possibility. You want to keep the price above the strike price so that the buyer doesn’t compel you to sell for more than the stock is worth.
In simple term, this options contract act as a safety net for others in a case where their stock falls below the strike price and you are willing the purchase the stock. If not, you as the options trader will receive a premium for assuring the other side of the market. Most value investors such as Warren Buffet use this strategy to sell put that are at a discount (usually 30 to 40% below the current value) to earn a premium.
The reason many investors do not like the idea of selling a put is it doesn’t provide high returns. Selling put when done correctly provides a measly 2 to 4% of the initial investment. To some that may seem a little
Sell Call
This is when you sell the right (option) for someone else to buy the underlying at a specific price in the future. When you sell a call, you’re selling someone else the right to buy it. The premium for the option represents the upside potential; the negative potential is limitless. You want the price to remain stable (or even fall somewhat) so that whoever buys your call does not exercise the option and compel you to sell.
Buy Put
Buy put, in other words shorting. Gives you the option to sell the underlying at a specific price in the future. You purchase a put when you want to sell a stock at a certain price. The difference between the share prices represents the upside potential (for example, if you acquire the right to sell for $25 a share and it decreases to $4per share). The premium you paid has a negative possibility. You want the price to plummet so you can sell it for more money.
Buy Call
Buy call, in another word longing. Allows you buy the option to buy at a specific price in the future. When you buy a call, you are purchasing the right to buy a specified amount of shares at a specific price. The upside potential is limitless, but the downside potential is limited to the premium you paid. You want the price to skyrocket so you can acquire it at a bargain.
LEAPS
Long-Term Equity Anticipation Securities, or LEAPS, are options with an expiration period of more than one year. In terms of the number of contracts, underlying security, strike price, and expiration date, LEAPS® are similar to shorter-dated stock options.
Sell LEAPS
Investors can use LEAPS puts to hedge their present stock holdings. If investors are concerned about the price of a stock they hold, they might consider buying LEAPS puts. When a LEAPS put is purchased, the buyer gains the right to sell the underlying stock at the strike price until the option expires.
Buy LEAPS
LEAPS provide an alternative to stock ownership for investors. LEAPS calls allow investors to profit from stock price increases while risking a fraction of the amount necessary to buy shares. If the stock price increases above the LEAPS exercise price, the buyer can exercise the option and buy shares at a lower price than the current market price. The same investor might profitably sell the LEAPS calls on the open market.
Our Take on Which is most Supreme
Borrowing money helps firms and people to make investments that might otherwise be beyond of reach, or to use assets more efficiently that they already have. Individuals may find that using leverage is the only option to afford big-ticket purchases like a home or a college degree. While leverage provides a lot of potential for profit, it may also cost you a lot more than you borrowed, especially if you can’t keep up with interest payments. This is especially true if you invest money you don’t have. At least when it comes to investing, leverage should be kept for seasoned experts until you have experience—and can afford to lose money.
At HustleVentureSG, we have 2 bloggers Edmund and Adam who have been using options as their side income. We hope that the information they shared here would provide great insight and in-depth understanding on how options trading works.
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