Posted on 12 October 2011.
Trading options for income has the potential to provide consistent profits that can serve as a primary or secondary income. Trading options for income requires a trader to focus on the stock and commodities markets and upcoming stock and commodity moving events, since the value of options is directly related to the movement in price of the underlying stocks or commodities on which the options are based.
An Option is a financial product that is comprised of a contract to buy or sell a specific amount of the option’s underlying instrument (which is a stock or commodity) at a specified price on a future date.
An Option contract to buy a specific amount of the option’s underlying instrument at a specified price on a future date is known as a Call Option. An Option contract to sell a specific amount of the option’s underlying instrument at a specified price on a future date is known as a Put Option.
Trading options for income is not as simple as buying and selling stocks because making money trading options requires the underlying stock or commodity that the option is based upon to go above (call option) or below (put option) the options strike price (target price) before the option expiration date to make a profit. If the underlying stock or commodity does not reach the strike price, then the option expires worthless.
One of the advantages of trading options for income rather than trading stocks for income is that options can be purchased for just a fraction of the cost of buying shares of a stock. This allows options traders seeking income to commit a much smaller amount of money to play a stock’s anticipated price movement higher or lower versus actually buying or sell short a stock, which frees up their trading capital for other trading opportunities.
For example, if a trader anticipates a move higher in the price of Apple, Inc.’s stock (AAPL), the trader would pay a hefty price to buy stock in AAPL, since it trades for hundreds of dollars. On the other hand, call options that have strike prices slightly above the current AAPL trading price can be purchased for a few dollars. If the price of AAPL stock goes up as anticipated, then the options that were purchased for just a few dollars also go up in value and the trade becomes profitable. This allows a trader that is trading options for income to control a lot more stock by leveraging their trade via
options. It also allows an options trader to spread out their risk, since the extra trading capital that is available using options to trade versus stock, allows a trader to commit trading capital to a variety of different options trades.
Since trading options for income carries the risk of losing all of the trading capital committed to trading options, there are a number of options trading strategies that can employed to greatly reduce the risk to options trading capital. See Managing Options Trading Risk for more details on options trading strategies.
Those who wish to start trading options for income are encouraged to learn as much as possible about the options market and the various ways options can be traded.
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