Is Stock Options Trading Right for You?
If You Own Stocks
For starters, I’d like to answer this question by saying anybody and everybody who is invested in the stock market MUST trade stock options. Notice I emphasize the word “must” and not “should” because if you own stocks you are not doing yourself justice by avoiding the use of options as an investment tool to enhance your returns in your stock market investing program. After all, isn’t this the primary objective of owning stocks in the first place? To make your investment grow?
While history has shown that the stock market is one of the best, if not the best, places to invest for future growth this is only true if one has a very well diversified stock portfolio and stays invested for many, many years thereby weathering the ups and downs that is typical in this kind of investment. But unknown to many stock investors there is a faster way to boost the growth of their holdings even if they don't have a well-diversified portfolio. And this is by using that investment tool called options.
Imagine yourself owning a piece of property, say vacant land, in the middle of a bustling metropolitan city. Definitely, your land will increase in value every year without you doing anything but let it sleep and allow time to do its job of inflating its value. Or you could increase its rate of growth and derive income from it by leasing that land. For the same reason instead of letting your stock sleep while waiting for its value to appreciate you could rent it out to others and derive income from it.
How do you rent out stock?
By selling call options against it. Renting out your stock via call options is similar to renting out your piece of vacant land and giving the renter the alternative of buying the land after a certain period of time. Similarly, the party renting your stock will also have the right to buy your shares during or at the expiration of the rental contract. But you don’t necessarily have to sell your shares if you decide against doing so. You can take action to avoid such event.
Dormant Real Estate in Busy Business Neighborhood
Not A Stock Owner?
If you aren’t currently into stock market investing but understand how the stock market works and want to venture into the world of stocks, you surely want to explore the world of options as well. You can actively participate in trading the stock market without actually owning any stocks.
I personally seldom own stocks but trade heavily in the stock market using only options. To answer the question in the title of this article, options trading is definitely right for everyone who plans to be active in stock market investing. Either as a stock owner or just a plain options trader like myself.
How Long Does It Take To Learn Options Trading?
I will say something that will at first discourage you from learning options but I will promptly tell you that you don’t need to fear the learning process.
I started to dwell on options in the mid-1980’s. Perhaps because I have a good logical mind I immediately grasp the concept of how options work. But it took many years for me to learn the various ways and means that options could be used as an effective investment tool.
The reason for my long learning curve was because I had to study this lucrative investment tool all by myself. I had no one tutoring and guiding me. In those days, when options trading was still in its infancy, there were very few reading materials to rely on and even much less in the way of the internet which was then virtually non-existent. Today, with so much material available in books, websites, videos, blogs, seminars and webinars, the learning process has dramatically shortened.
You don’t need to be a rocket scientist. Stock investing is not a game where the guy with a 160 IQ beats the guy with the 130 IQ.— Warren Buffet
Does one need to be good at math to learn options? Do I need some kind of degree to get started on this?
To quote Warren Buffet:
“You don’t need to be a rocket scientist. Stock investing is not a game where the guy with a 160 IQ beats the guy with the 130 IQ.”
This same statement can be applied to options since options and stocks are directly related.
Options contracts are now being traded in the hundreds of millions and it is said that most traders are independent individuals like you and me.
I’ve had many friends and acquaintances asked me about options and who have read one of my books. All are degree holders in many fields including engineering, finance, and the various sciences yet it boggles my mind when they come back to me and say: “Dan, it’s too complicated. I read your book and the whole thing just went over my head.”
But here is an example of a non-business person who learned options by herself with some guidance from me.
A little over a year ago one of those friends, a doctor, who knew little about the workings of the stock market asked me about options knowing that I traded options heavily. In one afternoon of a one-on-one lecture, I gave her the basics of what options is all about. She went away more curious than ever about the wealth-building potential of this phenomenon and decided to embark on a mission of learning.
She avidly read books and visited and subscribed to several websites about options. In less than three months she was doing virtual trading with an options broker that offered this capability.
Several months later, she began trading on her own and I hardly heard from her for assistance on this subject ever since. And this is someone who didn’t even know much about the stock market at all.
For one who is already quite versed in stock market investing, learning options should be a very short learning curve. The length of time needed to learn options trading really depends on each individual’s dedication and how much effort one puts into the learning process.
Options Trading As A Business
Could one trade options as a business or as an income generating activity instead of working for wages?
The very first thing I tell the person asking this is that options trading is not a get-rich-quick kind of deal. Trading options for a living can be done and is actually being done by many people out there who trade options as a living or use options to supplement their monthly income.
But just like getting into any business it requires capital to make a go of it. The amount of capital required is directly related to how much income one desires to get from the business. And in the case of options, or even stock investing for that matter, income is also directly related to the risk one is able to handle.
Trading options can be done using aggressive strategies for higher income but higher risks, or it can be done conservatively using conservative strategies with minimal risks. I use very conservative options trading strategies of selling mostly cash-secured puts, credit spreads and sometimes covered calls as discussed in many of my articles. I’m satisfied with the smaller, but steady returns. I’m also subscribed to some advisory services for trading long calls and puts, a more aggressive strategy, but very rewarding when things are right
So if you are looking to make $5,000 per month and you are happy with a conservative average return of 2-3 percent monthly (see Special Note below) you would then need a capital of around $170,000 to operate your options trading business.
You can reduce the capital required if you elect to use a more aggressive trading strategy like buying calls and puts and timing the stock market. There are many websites that use this aggressive trading system and claim to generate returns in excess of 10 percent per month. There are also many websites that use the credit spread selling strategy, a more conservative system, and claim to produce 5-10 percent monthly returns.
There are dozens of trading strategies one can use to trade options, from the very aggressive for high profits and high risk to the very conservative for almost no risk with lower returns.
You can start your options trading education by reading books on options. One of the best books for beginners, which remains in my library to this day, is "". This book is short enough to enable the newbie to get started in no time at all. One important feature is the section on how to avoid mistakes in the options business. OptionsTrading: Strategy Guide for Beginners
In the world of options trading, there are more than a dozen different trading strategies available to the investor/speculator, from the very aggressive to the very conservative. Returns of less than 3 percent per month, or about 30 percent annually, are considered conservative for an option player. The very aggressive trading systems can produce more than 10 percent monthly returns or about 100 percent per year. But as the saying goes, the higher the return the greater the risk!
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.
What Type of Investor Are You?
Questions & Answers
How much knowledge and experience is required to be a successful option seller?
For starters, you definitely need a good grasp of the essentials of options, and you need to be very familiar with the basics of how options operate. As to experience, it’s certainly helpful if you are currently doing some trading in options. If you are totally new to options and have not done any options trading at all, it’s not a good idea to start your options trading exposure using the strategy of selling options.
© 2018 Daniel Mollat