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Posted by on April 11, 2019

Over the course of the past year, the Options Clearing Corporation (OCC)—the SEC regulated organization responsible for guaranteeing options contracts—has helped manage more than 1 billion individual contracts. That is an average of 17 million new contracts being issued every day. While these trading volumes are not as large as those experienced by the underlying stock market, the apparent dominance of the options market certainly shouldn’t be ignored.

Options provide investors with a unique opportunity to diversify their portfolio, ensure specific trading positions, and also regularly exploit market volatilities. In order to successfully develop an options trading strategy, you will need to apply a nuanced approach to more traditional approaches to the market.

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If you are unfamiliar with the world of options trading, you probably have a lot of questions. Having these questions answered in advance will help provide you with financial protection and also help you achieve your daily ROI objectives.

In this article, we will discuss the most important things to know about options, including beginner options trading strategies all the way to advanced techniques. By making an effort to understand how options trading helps traders profit on a daily basis, you too can become a successful options trader.

What are options?

Options contracts are something that many people have heard of, but few people outside the trading industry actually understand. These contracts, however, are actually very simple. With an options contract, you hold the right to buy or sell an underlying asset at a predetermined price in the future (the expiration date). Options contracts are most commonly purchased in the stock market, forex market, and index markets.

The predetermined price will directly affect the value of an option. For example, if the value of stock is $50 once the expiration date arrives, exercising a $20 put option will allow you to immediately earn a $30 profit. This is because you can purchase the asset for less than it is worth and then—assuming the market is liquid—immediately flip it. If your options contract gives you the right to buy the asset for $80, on the other hand, then the contract itself will be worthless once the expiration date has arrived. No trader would willingly pay $80 for a stock when it is possible to buy that stock for $50 on the open market.

As the expiration date approaches, the value of each available options contract will change along with the underlying asset. Historically, options have been more volatile than the underlying assets they are connected to. This makes it possible for risk-tolerant traders to earn a higher daily ROI.

What is the difference between a call option and a put option?

Options contracts are available in two primary forms. Call options are contracts that allow you to purchase an asset at a predetermined price at a predetermined date in the future. For example, a call option contract may allow you to purchase a share of Google for $1,200 on September 1st, 2019. As Google’s stock experiences a series of ups and downs between now and then, the value of the option will also change. During this time—depending on where Google’s stock performs relative to the strike price of $1,200—the option will either be described as in the money, at the money, or out of the money.

Put options are essentially the opposite of call options, though they are also a little bit more complicated. With a call option, you hold the right to sell an underlying asset. As is the case with put options, the expiration date and the price (referred to as the strike price) will both be determined in advance. The value of a put option will also be directly related to how much the underlying asset is valued for during any given trading period. While call option holders will generally “root” for the asset to increase in value, put option holders will generally be hoping for the market price of the asset to decrease.

What are the risks and benefits of trading stock options?

As you would expect with any tradeable asset, options contracts have both risks and benefits attached to them. Understanding these risks and benefits can help you determine if options trading is right for you.

The “pros” of trading options include:

  • The ability to control the risk of investing: if you are unsure about a stock you want to invest in, purchasing an option below the current price (spot price) can help provide you with some investment insurance.
  • High levels of accessibility: if a stock is trading for, say, $300,000 (commonly the case with Berkshire Hathaway), then owning even a single share of this stock will be out of reach for most investors. Options contracts—even with expensive stocks like BRK.A—will always be much more affordable.
  • Limited downsides: unlike futures contracts, options simply give you the right to buy or sell an asset in the future, rather than the obligation.
  • Flexibility: as the expiration date approaches, you will have plenty of flexibility with what to do with your options contracts. Having the “option” to sell, double down, or hold your current positions makes it possible to adapt to ongoing changes in the market.

The “cons” of trading options include:

  • Higher levels of volatility: while this may be considered a benefit by some risk tolerant traders, there is no doubt that options contracts can be somewhat unpredictable.
  • Lower profit margins: because options are worth less than the underlying asset, you may need to open more winning positions in order to meet your daily profit goals.
  • Potentially worthless: while it is unlikely that the underlying asset will be worthless in the future, the time-restricted and price-enforced nature of options makes it possible to lose your entire investment.

When developing a successful options trading strategy, both these pros and cons will need to be actively accounted for.

How can I become a successful options trader?

The general goal of options trading is the same as it is for trading any asset. Traders will be looking for contracts that will be worth more in the future than they are in the status quo. Even if you do not plan on holding the options contract until the expiration date has arrived, you can still keep a position open until the price has reached its high point.

Generally, there are two different approaches you can take to trading options. You can either invest in options alone as if they were a primary asset or you can invest in options and the underlying asset, in order to create a hedged trading position.

If you are looking to create a “raw” options trading strategy, it will be crucial for you to consider a few technical indicators before opening any given position. The technical indicators that are best for options traders are also often used for trading stocks and other assets. The relative strength index (RSI), moving average indicators, and volume indicators will all be very useful. Looking for active trading patterns, such as bullish candles, price swings, and Fibonacci sequences will also help enhance your options trading strategy.

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If you are holding both options and the underlying asset at the same time, there are many different hedged positions you can potentially assume. These positions carefully balance the distribution of call options, put options, and positions in the underlying asset.

  • Married calls and married puts
  • Protective collars (and other varieties of collars)
  • Condors, Butterflies, and strangles
  • Other nuanced hedged positions

The combination of positions that is right for you will depend on which price changes are most likely to occur. As a result, conducting a careful technical and fundamental analysis will be even more important for traders who operating with a mixed portfolio.


The options market is one that is highly accessible, liquid, and capable of providing multiple opportunities for profit within a given trading period. Understanding the dynamics of options contracts—and why these contracts are inherently valuable—can help you create a trading strategy that is compatible with your risk and reward preferences. While the risk of options contracts should certainly not be ignored, the possibility of yielding high ROIs ought to be immediately apparent.


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