Not all traders make money trading; this is due to common trading mistakes you can actually avoid. In the ultimate guide below, I will be sharing with you exactly how to make money trading options.
I specifically share tips on how to make money even when the market is entering a recession and how to invest in a bear market.
Before we proceed, I want to clarify that no matter who you choose to learn from, selling option premium is the best way that you can earn consistent and predictable money in the stock market (besides, perhaps, buying an SPY index and selling covered calls against it).
I definitely believe it's important to BUY options during certain periods to reduce spikes in volatility.
As long as you are selling option premium, you can earn a lot of money and trade the most successful options strategy.
However, you need to ensure that you're disciplined and not greedy (like OptionSellers, for example).
So, how DO you make money trading options? In a nutshell, you would sell puts and calls, hedge your tail risk and buy options at market extremes.
But, if you are trying to day trade, trading penny stocks, using technical analysis, or trading forex, then it's highly unlikely that you'll be a profitable trader.
Make Money with Trading (Key Points)
- You need to learn valuable skills in order to make money trading options.
- If you want to make money trading, do NOT trade iron flies on ETFs like what Kirk Du Plessis teaches with Option Alpha.
- There's ZERO "safety net" when you sell a straddle.
- You need to mitigate risk and have the largest safety net possible when trading.
- When you sell puts or calls on underlyings that are at price extremes, you are giving yourself an advantage by having a large safety net (and you also collect a lot of premium).
- It's very important to buy options during market extremes to hedge tail risk (and participate in the upside potential).
How to Make Money Trading When the Market is Down & Entering a Bear Market
While it's best to prepare for a bear market during a bull market (by purchasing puts), you can also sell calls to make money trading during a bear market.
You ALWAYS want to open new trades at opportune times (meaning sell puts when the underlying has fallen and sell calls when the underlying has risen).
In a bear market, it's best to primarily sell calls because the trend will be your friend, however you can also sell puts if you'd like to take assignment and ownership so that you can participate in the upside.
During a bear market, you can fade the rallies and sell calls. Selling calls will permit you to make money trading when the market is extremely volatile.
"Trading often", like what Tastylive recommends, is also very dangerous because you're better off allocating capital to only the best opportunities.
There is ZERO "safety net" when you sell a straddle (except the premium collected).
You will deal with constant stress when you sell a straddle.
You'll have to log into your account 5 to 6 times a day to make sure that your position is not exceeding either the upper or the lower bounds.
Even if you sell a straddle and immediately enter a Limit Buy to Close order to take off that trade at 25% of the profits (or if you use a stop loss order), it's still very stressful to trade strangles.
Trading shouldn't be stressful.
Additionally, the market volatility during times like March 2020 experienced 2 - 3 standard deviation moves PER DAY; because of this, you would have to make many adjustments and or risk getting challenged on both sides of the trade.
Overall, selling a straddle is not a SMART idea to make money trading especially during a bear market.
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Advantages of Selling Puts or Calls
How can you earn ~3% / month profit trading options?
When you sell puts or calls on underlyings that are at price extremes, you are giving yourself an advantage because you have a large safety net and there's a high likelihood of price reversion to the mean.
You can also take ownership of stock at market extremes and then run the wheel strategy to participate in the upside.
Remember, you need to mitigate risk and build a large safety net when trading. It's best not to force trades.
I want to make as much money as possible as well, but I'm conservative with my trading because I do not want to incur any large losses.
One of the best put selling strategies is to wait until a stock is trading at a market extreme.
For example, if XYZ is normally trading within a range of $100 - $120 and then it falls to $105, you can sell the $95 put strike (if you want to own the security at that price) and then collect the premium.
If you sell the option and XYZ appreciates in value, you can then close out the trade early for a 50% - 70% profit.
If XYZ continues to appreciate to around $118, then you can sell the $130 call strike and then close this trade out early once it shows a ~50% profit. This is a high probability trade.
Will it be profitable all the time? No, but the odds are in your favor. The trade above is an example of your best way to trade and make money consistently in the stock market.
You can minimize risk and be opportunistic while, at the same time, trade with a substantial safety net.
Tips to Make Money Trading
- Minimize risk and be opportunistic while, at the same time, have a substantial safety net
- You will not win every trade, but it's important to stack the odds in your favor - when a trade is challenged, it's best to be loss seeking and aggressively close out the trade for a small loss
- I do not like selling strangles (unless I'm trading a 0 DTE strategy), instead I recommend opening one leg at a time because, inherently, if it's a good time to sell a put, then it's a bad time to sell a call
- Sign up for Trade Alerts – Receive real-time trade alerts so that you maximize your profits and minimize your mistakes; we have a Trial Offer of $19 for 7 days.
Which Securities Should You Invest in?
Some securities are better than others.
It's best to trade indices or ETFs, or market leading stocks.
Do not aggressively trade small capitalization stocks with low liquidity.
Instead, focus on building a watch list that includes QQQ, IWM, SPY, MSFT, WM, JPM, etc.
You can also protect yourself and minimize portfolio volatility by selling vertical credit spreads.
You need to look at the trading range of an individual security and then discern whether it is an A- or B+ trade opportunity.
It's important to only trade the best opportunities because when the market goes down, everything has high implied volatility, and the Volatility Index (VIX) will also be very high.
When the VIX is high, this means that you will collect a lot of premium when selling options, but you're also assuming heightened risk and it's important to remember that NOT all opportunities are the same.
This is another reason why you need to pay attention to which of the securities on your watch list are performing well so that you make good decisions on which trades to make.
From my personal experience, the worst trades have always been with the "B" or "C" stocks such as Baidu or Electronic Arts. On the other hand, I rarely lose money with Facebook ("META"), Amazon or Visa.
Make Money Trading: Selling Puts and Calls
Overall, the best strategy when selling options and trading options should be to sell puts on large cap market-leading stocks that are trading at the low end of their range.
As they increase in price, you can then sell a call. I usually do not proactively sell calls on many securities because the market has a tendency to go up.
However, I will aggressively sell calls when the market is declining consistently and we're in a bear market - or when an individual stock is challenged to the downside and I want to finance the roll of the puts by selling calls.
For example:
If the market is weak then I will wait for Facebook, Amazon, Mastercard and Lockheed Martin to fall to the low end of their trading range.
If that happens, I will sell a put that is around 10% - 15% below the current trading price. I'll then wait to see if the stock quickly rebounds in price. If it does, I will opportunistically sell a call on that specific security and turn the trade into a strangle.
In general, I rarely sell a naked call or vertical call spread on a stock that I don't already have an existing put position on.
The reason for this is that it doesn't use any additional buying power when selling a call (with the same expiration) if you have an existing put position and converting converting a short put or short call position into a strangle.
When to Trade Verticals
I do not recommend trading iron flies on ETFs. In general, I feel that vertical credit spreads provide greater capital efficiency and also protect against tail-risk. This more than compensates for the small decrease in premium received.
As a result, I have been trading more spreads recently. I accept collecting less premium in exchange for limiting my downside risk during a large drawdown in the S&P 500.
I also buy puts for portfolio insurance during bull markets. These put options are then sold after a spike in VIX.
These protective puts will protect against "black swan" events.
When you trade vertical credit spreads, it is difficult to manage / roll that position, however I still feel that the more efficient capital usage and protection outweighs the smaller premium and rolling difficulty.
Overall, it's important to build a wide moat and a strong safety net. I target a monthly return of about 3% to 3.5% and while attempting to consistently make money trading and reduce portfolio volatility.
My strategy minimizes risk while maximizing returns, even during volatile times.
Why You Should NEVER Day Trade
Day trading for beginners. Day trading strategies, Swing trading, etc - blah, blah, blah! All of it is BS and none of it works.
When someone asks me, "how to start day trading?" I tell them that it's a scientific fact that they will lose money. Numerous scientific research papers have looked at ~400,000 day traders and concluded that 99.85%+ of day traders lose money.
And the few that earn money end up making less than minimum wage AND the study believes that, with time, many of those day traders who were profitable would have ended up losing money.
Want to read the studies? You're welcome to do so here.
Can You Make Money Trading Options?
Yes, you can definitely make money trading options. The best way to do so is by selling option premium, hedging the tail risk, buying options at market extremes and taking ownership of quality stocks, indices and ETFs during market crashes.
Review all of the tips that I have shared in this post and also read my other posts where I share valuable information about options trading.
I want to remind you that selling straddles does not provide a safety net (except for the premium received) and I would NOT recommend trading straddles.
If you want to know more about how to make money trading, enter your e-mail address below and receive $400 worth of free training.
Can You Make Money Day Trading Stocks?
Unfortunately no. Research has shown that it's "virtually impossible" to be a profitable day trader. Stick with selling option premium if you want to make money trading.
My free materials are significantly better than anyone else's paid materials. You can also leave your questions in the comments section below and I will answer them. Thank you!
Want to connect with me directly? You can contact me on Facebook, LinkedIn or on the David Jaffee personal website.
Frequently Asked Questions
Should I take ownership of stocks after being assigned a put option?
If you feel that a stock is vastly oversold then taking ownership is a great way to participate in the upside of the stock.
What is the fastest way to make money trading?
The fastest way to make money trading would be to sell put options.
Should I buy options?
Yes, but only in certain situations.
Buying options (both puts and calls) at market extremes is a great way to profit.
What are some good options trading strategies for beginners?
Selling puts on stocks that you wouldn't find owning.
Taking ownership of oversold stocks.
Buying options at market extremes to protect against market volatility.
What percentage of options traders make money?
Probably around 50% of options traders make money. The key is to have a strategic and statistical edge. Without an edge, then you're simply gambling.
What is the most successful options strategy?
The most successful options strategy is to sell puts on large capitalization, market-leading, stocks that you wouldn't mind owning.
Is there a guaranteed profit option strategy?
No, all options trading possesses some risk and trading profits are not guaranteed.
Do option traders make money?
Yes, many of them do as long as they're patient and disciplined.
Are there option traders who made millions?
Yes, I'm confident that they are, but they also likely trade with a large account. You're better off trying to hit singles and target a return of about 3% a month.
What is the best options trading course?
The best options trading course is by David Jaffee from BestStockStrategy.com, you'll learn how to target a monthly return of about 3% while also reducing portfolio volatility by selling puts and calls (and also buying options during market extremes).
