While headlines touting million-dollar options profits may be alluring, building wealth through options requires realistic expectations and a focus on consistent, long-term returns. Here, we'll explore a practical case study and outline a legitimate options trading example suitable for beginners.
In 2023, I achieved significant market outperformance with two portfolios: a large account that beat the market with lower volatility (superior risk-adjusted returns) and a smaller portfolio generating over 100% growth. These results demonstrate the potential of options, but emphasize the importance of sustainable strategies over unrealistic goals.
Options Trading for Beginners: Start the Right Way
Options trading offers tremendous opportunity, but navigating its complexities without a solid foundation can be costly. This blog post provides a framework for beginners, introducing a proven strategy you can learn and implement to gradually build your trading skills and profits.
Additionally, you can also read this blog post which is an
options trading guide.
Making Money with Options Key Points
- 1. Think about the long-term and learn a legitimate skill
- 2. It's relatively easy for us to make money by trading, since up to 98% of our trades are profitable
- 3. It's important to limit risk by trading a small number of contracts and closing out trades early
- 4. Selling option premium has a high statistical probability of profit
How to Easily Trade Options [My Story]
I know that a lot of people are greedy. They're not satisfied with earning ~3% a month.
The reality is that if you try to make more money, you're also going to assume more risk, which will increase the likelihood of losing money.
I want to share with you my personal options trading example and how to trade options easier.
Who am I? My name is David Jaffee.
Who is David Jaffee?
I graduated from an Ivy League University and I worked as an investment banker for five years (click for a video about my experiences).
Despite my background, I still gave in to my inherent human greed to make more money as quickly as possible. I can tell you that it really sucks when you lose money and if you'd like to learn from my options trading example, then it's possible that you won't make the same mistakes that I have.
I'm OCD and fanatical about optimizing my trading which has enabled me to constantly improve.
Don't be greedy. You can earn ~3% a month using the options trading example strategy I am going to share with you in this post.
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My Options Trading Example
Focus and prioritization are extremely important when trading options. Navigating the information overload of our digital age can be paralyzing, especially for aspiring traders.
The key lies in transitioning from passive consumption to active creation. Prioritize your information sources and curate a concise watchlist tailored to your account size.
For accounts under $15,000 - $20,000, a focused watchlist of five high-quality securities (B+ and A- opportunities) is optimal. Maintain only 2-3 simultaneous positions to manage risk and optimize focus. This approach allows for deeper research and execution on each trade, maximizing the potential for income.
Even with multi-million dollar accounts, I advocate for limiting active positions to 6-8 securities. This ensures optimal focus and risk management, regardless of account size. This strategy requires discipline and selective action, but it lays the foundation for consistent and informed options trading.
I usually have positions on the following securities:
- Facebook / META
- Amazon
- JP Morgan
- Mastercard
I sometimes also have positions on McDonald's, Microsoft and Lockheed Martin as well. I watch these stocks and get comfortable with the recent trading range.
Let's say that, as a trading example, XYZ stock is trading around $175, and its recent trading range is from $170 to around $182 dollars.
I simply wait for XYZ to fall to the low end of that trading range, to around $172 dollars, and then I'll sell an out of the money naked put option with a strike price of around $158 dollars.
This is a good put option example and exemplifies our call and put options and options trading strategies.
Options Trading Strategy Tips
- Limit Your Information Sources – Do not read SeekingAlpha.com or watch CNBC. Those are for entertainment purposes and will not help you make money.
- Create a Watch List – I only trade ~15 stocks, or indices, and I have positions on ~4 - 5 underlying securities at one time. I keep things incredibly simple and ignore everything else. I highly recommend that you narrow the amount of stocks that you trade. If you have an account size of $20,000, you should only trade 2 - 3 securities at one time.
- Trade from Your Phone – Ever see those losers with 8 monitors? Yeah, it's likely for marketing purposes. I make all trades from my phone and have never used any charting software. Keep things simple because if you complicate things, it'll likely negatively impact your returns.
- Get Familiar with the Recent Trading Range – Get comfortable with the recent trading range on the stocks in your watch list. If the stock trades at the high end of the range, sell a call. If it trades at the low end of the range, sell a put
- Trade Naked Options (when VIX is high) and Spreads When VIX is Low– As discussed before, call your broker and request the ability to trade naked options. It's a lot easier to manage option positions when trading naked (although I definitely believe that there is a time and place to buy options).
- Sign up for Trade Alerts – Receive real-time trade alerts so that you maximize your profits and minimize your mistakes. We have a 14 day trial offer.
Win Up to 98% of Your Trades
Follow My Trades with Real-Time Trade Alerts
Options Trading Example: Naked Options
Selling Naked Options: A Calculated Risk for Experienced Traders
While it's true that naked options
carry inherent risk, they can be valuable tools for experienced traders. Their allure lies in maximizing credit received and simplifying position management compared to vertical credit spreads. Additionally, during significant selloffs, selling naked puts on well-established stocks allows potential ownership at a discount.
However, buying options also plays a crucial role in balancing portfolio volatility. Traders should opt for low-volatility periods to deploy vertical credit spreads, capitalizing on premium decay while limiting risk.
Naked options are generally most suitable when volatility (VIX) is high or ownership is the desired outcome.
Many traders fall into the trap of overtrading spreads. Some trades will trade 10x more spreads than they would naked options. This is a mistake. When trading spreads, traders lack flexibility and also if the stock trades between the long and short strike, then taking assignment of so many shares can overwhelm an account, forcing potentially detrimental broker-mandated closures.
Vertical credit spreads offer better capital efficiency and defined risk, mitigating volatility expansion inherent to options trading.
For profitability, consider selling a naked option (or a vertical credit spread) on leading stocks, or indices, with expiration within four to six weeks.
Monitor the position, aiming to close within two to three weeks or upon reaching your profit target.
Best Time to Trade Spreads
My Options Trading Approach:
I primarily favor spreads over naked options when the VIX falls below 20. Spreads offer valuable protection against unexpected market volatility, particularly violent selloffs.
Vertical credit spreads provide a layer of insurance that can even turn volatile periods into profit opportunities.
Stock options trading demands discipline, and violent moves happen roughly 1 - 2 times a year, causing significant volatility spikes. Utilizing spreads strategically mitigates the risks associated with these unpredictable events.
Options trading for dummies: to summarize, trade spreads when the VIX is below 20, and naked options when the VIX is above 20.
Another way to earn extra money is by selling option premium. It helps increase your income.
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Reducing Risk When Trading Trade Naked Options
Consider this scenario: You've sold a $158 put option on XYZ for $1 ($100 per contract) when it was trading at $175. The option expires in 6 weeks.
Two weeks later, XYZ climbs to $185.
However, with XYZ now at $185, that option has dwindled to 15 cents.
In essence, you've captured 85% of the premium within just 1/3 of the option's lifespan. Holding onto it for the remaining four weeks to collect a mere 15 cents per share is inefficient capital allocation.
Therefore, close that position and explore your watchlist for new put or call selling opportunities. If a security appears near its trading range's bottom, sell an out-of-the-money put and repeat the process.
This scenario exemplifies a simple put option trade within our broader options trading strategies. At
BestStockStrategy.com, we cater to both novice and seasoned traders seeking to master options.
That is the simple options trading example that has allowed me to reduce risk while trading options.
By learning our trading strategy, you may be able to earn millions of dollars by trading options.
If you want to learn more, then click and read this post about selling option premium. It will help increase your income.
Frequently Asked Questions (FAQs)
What are the 4 types of options?
Buying a call option, selling a call option, buying a put option and selling a put option.
When should you buy options?
The best time to buy options is during market extremes. When the stock market is oversold then buying a LEAP, or long-dated call option, is a great strategy.
When the market is overbought, and euphoric, that's a great time to buy put options to protect your portfolio and limit future portfolio volatility.
Why do option buyers lose money?
Option buyers lose money because most options expire worthless. Even so, it's definitely possible to make substantial amounts of money by buying options if you're able to buy options at market extremes.
Is option trading like gambling?
Option trading is not like gambling if it's done correctly. While you can gamble with low probability trades, it's better to be disciplined and have the probability of profit in your favor.
What are the types of options contracts?
There are two types of options contract: puts and calls. Both puts and calls can be purchased to speculate on the direction of the security or hedge exposure.
They can also be sold to generate income.
