Friday, January 20, 2012

How to Make Money Options Trading

Options Give a Trader Leverage
Long ago I learned how to make money trading options, and it isn't a stretch to say it has made an incredible difference in my financial fortunes. Suffice to say that it does take at least a few dollars (although some low capital options trading alternatives exist also) to get started - but once you have made your first trades through an options broker you'll never want to go back.

Understanding the Risks Involved in Option Contracts

Before anyone takes on the task of learning how to make money trading options one has to understand there is also the significant risk of losing a lot of money as well. Option contracts in and of themselves convey no ownership claim on a particular asset or income stream. Instead, an option contract conveys the right to buy or sell the asset or income stream - meaning that any profits to be had must come from the option price gain between the time the contract is bought and sold.

Here so far we have spoken from the point of owing (rather than shorting) option contracts. Learning how to make money trading options using shorting techniques is really not suited for people just getting their feet wet. With that in mind, lets talk about what makes the earnings potential of option trading so powerful.

Revealing the Power of Options Leverage

One of the most important and powerful lessons of learning how to make money trading options comes from understanding and using options leverage properly. Leverage has the power to turn very modest investments of a few thousand dollars into five figure profits when the pieces fit together. Clearly market timing and a little good fortune have a great deal to do with the outcome of any leveraged trade however understanding and properly implementing leverage in an options trading account creates the opportunity for success. People familiar with carry trade leverage will easily understand the risks and opportunities of option contracts but beginners will need to make a few small trades first to get up the learning curve.

Tips on How to Make Money Trading Options

Now that you have some introduction to what makes option trades worthwhile, here are a few tips that ought to help you sort out some of the nuances of making your first trade or two. First off, it is imperative that you find and use a low cost option broker. Transaction costs kill profits and hinder a trader's flexibility in entering and exiting trades - so find a good inexpensive broker.

Second - When you are just starting out, DO NOT begin by investing in contracts that are at or near the money and close to expiration (glossary of options trading terms). The odds are just too good that your trades will fail and you'll end up banned from trading and possibly worse. Start out with deep in the money contracts that are more than a month from expiration - and cash out of those trades well before they get close to expiration. Actually - if you get a decent gain early on - cash it in... profits usually don't get better with time when it comes to option trading - so take the first bump up if you get one - it'll probably be your best offer.

Third - if you don't have enough capital to start, consider trying a less capital intensive alternative called binary options. These contracts last a day or less, pay out huge yields, and require as little as $100 to be able to trade effectively.

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