Stock Options Trading Is Like Owning an Online Casino
How Does It Work?
By being an options seller you become like a casino to options buyers. It's like operating your own casino at home. Statistics show that buying options exposes the buyer to the risk of losing 80% of the time, while on the opposite side, the seller gains this advantage.
Why, then, are there options buyers when the odds are so high against them winning? Because when they win, they win big. They have to win big to make up for the greater number of times when they lose.
If you know little about stock options or have never heard of this phenomenon, it’s high time you looked into it. Especially if you are active in the stock market and want to enhance the income generating potential of your stocks. You don’t even have to own stocks to get into the money-making venture of selling options as a source of steady income.
How Do I Start My Home Casino Business?
When I said that options selling is like owning a casino at home, I didn’t literally mean you should set up a craps table, a roulette table, blackjack tables and slot machines in your living room and open your doors to the public. No, this is not what I meant.
Those who are using stock options in the stock market find the activity so unbelievably similar to casino gambling that they have come to refer to options trading as casino gambling. But you’re the house instead of the player. Options sellers, refer to themselves as being the equivalent of casino operators.
When you operate your home options casino business you don’t need to physically see and meet the general public as your patrons. Your customers are invisible people who bet on stock options in the stock market and you take their bets without seeing each other.
The stock investor, speculator or trader, bets that the price of a certain company stock, index, or ETF will rise, or drop, as the case may be, to a certain level or beyond during a specified period of time.He/she does this by buying option calls or puts in the options market through a broker.
You, the virtual casino operator, on the other hand, don’t believe the conditions of the bet will materialize within the specified time period. You, therefore, take the bet also through your broker.
The betting and accepting of the bets are done by buying and selling of options. The bettor buys options and the seller, you sell the options.
Here is how you set up your little casino business.
If you are already a stock investor and are familiar with the stock market but have little or no knowledge of options, you must first educate yourself in this field. Start by reading books and articles on this subject and understanding the basics of options.
There are numerous books, articles and blogs on stock options that should get you started. If you are not familiar with the stock market and how it operates, this is the first thing you need to learn before you even attempt to understand options.
How Long Is The Learning Process?
Like everything in life, to be proficient in any undertaking one must devote time and dedication to the task. Learning to trade stock options is no different.
Options can be very complex and be intimidating for one who is just starting. But isn’t engineering, architecture, medicine and all collegiate degrees just as daunting in the beginning?
While formal college education takes years to complete and then more years to gain experience, learning options for the dedicated student may take less than one year. And this is for one who has absolutely no exposure to the financial world and the stock market in particular.
For one who is already familiar with the stock market, it may take just a few months to learn and understand options and perhaps another few months more to gain the necessary experience to actually trade them.
Unfortunately, there are no universities or formal schools that teach options so this is something that must be learned on one’s own commitment.
After you’ve gone through your options education and have achieved enough knowledge you can slowly proceed to start practicing what you’ve learned. The best way to do this is to look at option chains of stocks that you fancy and trade them on paper, or what is called paper trading
Once you are confident that you have gained enough knowledge and have gotten the feel of trading options on paper, the next step is to open an account with a stockbroker who specializes in options.
Listed below are the names of some brokers you might want to look into. There are many more options brokers out there that may be good choices. The next section below will serve as a guide for determining which brokerage firm would suit you best.
- Fidelity: carries a reputable name in the brokerage world.
- E*Trade: is a popular options broker, known for its option analytics like option greeks calculations.
- CharlesSchwab: is a well-known discount brokerage who just recently acquired OptionsXpress. OX is a firm specializing in options trading.
- TD Ameritrade: Like Charles Schwab, this broker acquired Think Or Swim, another popular options trading specialist
- Interactive Brokers (IB): is a global options brokerage firm.
- TradeStation: has introduced its feature-packed new age option trading platform called “OptionStation Pro.”
- OptionsHouse: has a web-based trading platform as well as a mobile app.
- Questrade: has four different platforms for trading (IQ Essential, IQ Web, IQ Edge, and IQ Mobile), and all four support options trading giving ample choice to the end-user to select the one which fits best.
- Scottrade: offers option trading which includes functionality to trade option strategies.
- TradeKing: recently launched a new trading platform called "TradeKing LIVE,” which integrates options trading (in addition to other security classes)
What to Look For In an Options Broker
First and foremost, the broker must be very knowledgeable and experienced in its options trading services. In the early days of the options industry, there were few brokers who completely understood options.
They offered options trading services only as an afterthought when its clients started demanding this service. Consequently, their service was often clumsy. In later years specialists in options brokering entered the market and they offered excellent services to the options trading community.
Among the early brokerage houses that offered options trading was E*Trade. This was followed by other first-rate brokerage firms as those listed above. The ones who were not so experienced in the business went out and bought the existing well-known houses. TD Ameritrade bought Think Or Swim and Charles Schwab bought OptionsXpress.
Secondly, with the advent of computerized trading, brokers’ fees have dramatically gone down. It is important to select the one with the lowest fees if you believe you will be doing a good amount of trading.
Another important factor to consider is the minimum deposit requirements to open a new account. If you have limited capital to start your options Casino this may be a very important consideration.
There are other considerations to keep in mind when selecting an options broker but the three above are the most important. I would like to add one more important element, and this is the flexibility of the broker in its determination of whether or not to allow the client to trade options using certain strategies.
Brokers tend to be lenient with clients who are more into buying calls and puts but when it comes to the more sophisticated, more conservative trading strategies, brokers can be quite strict in pre-qualifying clients. You can more or less foretell this characteristic of the broker when you file your application to open an account.
If it asks and specifies too many strict conditions for trading options, you may want to look for another broker that is more moderate in its credential requirements.
Lastly, and I believe this is a must for starters in options trading, choose a broker whose trading platform allows virtual trading. This is a service offered by a few brokers, and I mean very few, where you can open a virtual account and deposit virtual funds into the account.
You can then trade options, or stocks, using this virtual trading platform where you appear to be actually trading the real thing using real money. In layman’s term, virtual trading with virtual money means phony trading with play money but getting the feel of the real thing.
How Much Capital Do I Need?
If you were to open a real casino you would need millions of dollars to get started. You can set up your options home casino business with as little as $1,000. But I don’t recommend it.
Your ability to sell options would be greatly restricted and you would not get the desired results with such a small capital. The return would be so small as to not be worth the effort. $5,000 would be okay to get started but $10,000 and more would be better.
Remember, you have to reckon with some expenses such as broker’s commissions and fees which makes your net return minimal when operating with a very small capital.
What Can I Expect To Make From My Options Selling Business?
This is a difficult question to answer since there are so many options trading systems that one can use.
Using very aggressive strategies with very high returns but high-risk one can gain as much as or even more than 100% annual return. The very conservative systems can return about 15% - 25% per year. There are also middle-ground conservative plays based on the system of selling combined options, more commonly known as credit spreads, which can increase your annual return to about 50%-75%.
It would be too much for me to describe the merits and shortcomings of each system in this short article. At this point, they are too complex for you, the beginner, but you will certainly learn them eventually as you progress through your learning process.
There Must Be a Downside to This Business
Of course, there is!
Is there anything in life that is a sure thing except for taxes and death? I will start by saying that if you plan to get into the options selling business, your home casino business, with less than $10,000, it may not be as rewarding as when you have a much bigger capital.
The reason I say that is because the downside to this business is you could get stuck with owning a stock for some length of time. Owning stock is a downside? No, it’s not if it’s a solid company or an ETF that is just undergoing an unusual tough business climate or if the general economy is in decline. Even then, you would have acquired the stock at a much-discounted price.
Eventually, things will rebound, as it always does, and the stock you own could then be very valuable since you bought it at a reduced price. All this is assuming you sold puts and got to own the stock when the decline came about. Also, this is assuming that you used the very powerful strategy of rolling out your put options as the stock continued declining.
The process of rolling out options is described fully in another article in HubPages.
Should I Sell Calls or Puts?
I'm been talking about selling options as being like operating your own little home casino. Let me qualify that statement by saying that it is safer and more profitable to operate your casino by selling puts more than calls.
When selling call options the situation could be a bit more difficult if the underlying stock of your calls went into a rising trend. While you could also do roll-outs in the same manner as with puts, it may lead to a situation where you may not have enough equity in your account to meet a possible option assignment.
To be on the safe side you need to own the underlying stock and sell call options against it. This is popularly known in the stock market as 'covered call selling.' It's a very good strategy for someone who already owns stock. But as your own home casino business it is not as lucrative as selling puts against cash in your account.
This is the reason why investors who are in the options selling business tend to do put selling more than call selling. As you learn the mechanics of options you will see the meaning of what I’m saying here.
To sum up, getting into the options selling business, or what is likened to having your own home casino, requires a learning process. I repeat the importance of voraciously reading books, manuals, articles and visiting websites for information about the very lucrative world of options trading.
Among the many books I've read on how to maximize profits from options selling "" is the best one yet I've come across. This is a must-read for every options trader that wants to specialize in selling options. The Complete Guide to Option Selling
Any and all information pertaining to trading stocks and options including examples using actual securities and price data are strictly for illustrative and educational purposes only and should not be construed as complete, precise or current. The writer is not a stockbroker or financial advisor and as such does not endorse, recommend or solicit to buy or sell securities. Consult the appropriate professional advisor for more complete and current information.
Questions & Answers
It has been said that option selling is extremely risky due to the fact that it has the potential for unlimited losses. How do you address this issue?
The potential for "unlimited losses" in option selling is a myth! Driving an automobile is risky and extremely dangerous for someone who doesn’t know how to drive. If we were to consider the great risks involved in driving, there would be very few drivers around, yet we see millions taking this so-called risk. Why? Because for the experienced and safe driver, the risk of him causing an accident is almost totally eliminated. Of course, there is the risk of another driver being careless and causing an accident. In this respect, the option writer is in a safer game than the driver in that there is no second party that can create a dangerous situation for him. The experienced and knowledgeable option writer is in full control of his trading system and knows how to organize his trades so that the “unlimited loss” factor is kept to the bare minimum and may be totally eliminated. If a situation arises where it can’t be eliminated, the risk factor is so greatly reduced that its ill effects are minimal. Much less than if you owned stocks in a down market.Helpful 1
This is the reason why investors who are in the options selling business tend to do put selling more than call selling. As you learn the mechanics of options, you will see the meaning of what I’m saying here. Can you please elaborate more on this? I still can't tell the difference.
Does selling stock options apply to commodiities and index futures optons?
I don’t see why not. The mechanics of how options work are the same for stocks, commodities and futures.
Does the option selling system guarantee profits or capital appreciation? How about when the economy goes into recession and the markets are depressed?
Nothing is guaranteed in this life except death and taxes. Even real estate, which is regarded by many as the ultimate sure thing when it comes to appreciation values, has its downturns as demonstrated in 2008 when the real estate market went bust. I will be honest and say that in a situation where the stock market goes in a swift and deep decline option selling may suffer similar consequences as any other investment. I will hasten to add though, that the negative impact of a long and deep recession will be less for the option seller than if he were in any other investment, including safe harbor mutual funds.
What options are recommended for the option writer? (indexes, stocks, ETFs, etc.)
Conservatively, ETFs are good for option selling as well as the various indexes. For the more experienced and seasoned options investor stocks of well known and long established companies will do as well. Company stocks tend to have higher options prices thus producing higher returns.
© 2018 Daniel Mollat