Understanding Options Trading
Hey folks, Phoenix here!
With Nate traveling to meet up with Jeffry for the Apollo event I decided to take the reins and provide another lesson for the beginners and a refresher for the more experienced traders.
But first, if you’d like to sign up to attend Nate and Jeffry’s Apollo event, you can do so right here.
Without further ado, let’s jump right in with today’s lesson:
If you’ve been looking for a way to grow your portfolio, but don’t know how, then options trading might just be the game-changing catalyst you’re looking for.
But remember, options trading does not come without risks… There’s plenty of potential for great returns, but there is also a lot of risk inherent when trading options. At the end of the day, it’s a balancing act.
So today we will talk about some of the basics of options trading to help you get a better idea of what you’re getting into.
What is an option?
Options are contracts that grant you the right, but not the obligation, to buy or sell an underlying asset at a predetermined price before a specific expiration date. They come in two main types: calls and puts.
Buying a call option gives you the right to buy the asset, and buying a put option gives you the right to sell it.
Why trade options?
Unlike buying outright stocks, options trading offers you versatility, leverage, and a strategic edge — if you play your cards right… It’s a great way to speculate on trends and trade momentum on underlying stocks.
- Flexibility: Options allow you to adapt and adjust your positions according to any market condition. Bullish, bearish, or stuck in a rut – there’s an options strategy for that.
- Leverage: You can control a significant amount of shares with a relatively small amount of capital compared to buying the stock outright. This means your potential return on investment can be significantly higher.
- Risk Management: Options can be used to hedge against potential losses in your portfolio, acting as insurance policies against other investment positions.
- Momentum: If a stock is trending in a direction, let’s say upward, and you buy a call then a few percent move in the stock during the trading day could make your options move double digits. You can really take advantage of trends that you hold a lot of conviction in.
Options trading doesn’t come without risks:
While the rewards can be high when trading options, so can the risks.
Options are generally more volatile than stocks, and it’s entirely possible to lose your entire investment, especially if you’re dabbling in options without a solid strategy.
While this is entirely possible with stocks, it’s a whole lot more likely with options, so you have to understand how much you are willing to lose and keep a strict risk management strategy.
Time decay is another critical factor when trading options. Time decay is when options lose value as they approach their expiration date, which can erode profits if not managed properly.
Let’s say we buy a call for Apple that expires two months from now. And that call predicts that the price of Apple’s stock will increase by $20. On top of the underlying contract is what we call time premium. It’s extra value built into the option by those two months simply existing that give us more time for our prediction to play out.
If days tick by and our prediction isn’t playing out quite how we hoped then time decay will eat away at this premium as we lose more time on our option.
The most basic of options — Calls and Puts:
Call Options: Think of call options as your bullish buddy.
When you buy a call, you’re betting the stock will rise above a certain price (the strike price) by a certain date (the expiration date). If it does, you’re in the money.
If not, the most you lose is what you paid for the option, known as the premium.
Put Options: Puts are your bearish best friend.
Buying a put option means you expect the stock to fall below the strike price by the expiration date. If you’re right, you can sell the stock at a higher price than the market offers.
Again, if the stock doesn’t drop, your risk is limited to the premium paid.
Getting started trading options:
Now that we understand some of the basics, here’s how I’d recommend getting started for someone pretty new to the world of options trading.
- Education First: Before you even think about trading, educate yourself. Read books, watch tutorials, and maybe even take a course or two on options trading. Nate offers tons of classes and materials on this!
- Practice with Simulators: Use online simulators to practice your strategies without financial risk. It’s a safe space to learn the ropes.
- Develop a Trading Plan: Define your investment goals, risk tolerance, and specific strategies. And always, have an exit strategy.
- Start Small: Dip your toes in with small investments to test the waters before diving in fully. Remember, even experienced traders face losses.
- Keep a Journal: Record your trades, the thought process behind them, their outcomes, and what you learned. This will be invaluable as you refine your strategies and grow.
Now remember, options trading isn’t a guaranteed road to riches, but when learned and done correctly with solid strategies, it can be a fantastic way to grow your portfolio, especially for portfolios that are smaller.
At the end of the day, we need to remember the risks inherent in options trading but also not let them scare us off from the rewards that options trading can grant us.
That’s why both Nate and I spend so much time on live classes, teaching our students, and making content and guides that help folks to really understand what we’re doing, how we’re doing it, and why we’re doing it.
Let’s build wealth together!
— Phoenix van Zutphen
P.S. One of the best ways to get to know the world of options trading is through Nate’s Automated Options program. I’d love for you to check it out right here.
