In this post, I will share with you an options trading example and how you can use this best option strategy to earn $1+ million dollars a year by trading options.
Earning a million dollars a year by trading options may be a bit misleading because you will need to have a multi-million dollar account. In general, we target a return of around 40% a year.
My options trading example: In 2017, I earned 72 percent. In 2019, my smaller account was up 117% with a 100% win rate!.
If you want to make consistent profits, your goal should be to learn a legitimate strategy for the long-term.
Options trading for beginners is very difficult, primarily because a few mistakes can end up being very costly.
If you want to read about an options trading example and strategy you can use to start making money, then this blog post is definitely for you.
Additionally, you can also read this blog post which is an options trading guide.
Making Money with Options Key Points
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 making money and 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.
My Options Trading Example
The most important thing that you need to do is limit your information sources. We live in a society where there's way too much information and there's not enough action.
You want to turn yourself into a creator and not a consumer.
The second thing that you want to do is to evaluate your account size. If you have an account size that is below $15,000 - $20,000 then you want to have a watch list with five securities on it.
You must also remember that you should have no more than 1-2 positions / trades on at a time (focus on trading B+ and A- opportunities).
You'll have a watch list of about ~10 securities that you can choose from.
This is important if you want to earn money using my options trading example.
If you have a multi-million dollar account, I still believe it's best to only trade 4 - 6 securities at once.
I usually have positions on the following securities:
I sometimes also have positions on McDonald's and Microsoft as well.
I watch these stocks and get comfortable with the recent trading range.
For Facebook, which at the time I'm writing this, is trading around $175, I know that its recent trading range is around $170 to around $182 dollars.
I simply wait for Facebook to fall to the low end of that trading range, to around
$172 dollars, and then I 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 examples and options trading strategies.
Options Trading Strategy Tips
Be a Successful & Profitable Trader
Follow My Trades with Real-Time Trade Alerts
Options Trading Example: Naked Options
I know that a lot of people right now think that selling naked options is incredibly risky.
The people that say that are likely not successful and profitable traders.
Selling naked options can be a lot safer than selling vertical credit spreads because it
maximizes the credit that you receive.
It's much easier to manage and roll a naked position as opposed to a vertical credit spread.
Also, when you sell a naked option, it inherently reduces your buying power by substantially more than a vertical credit spread.
As a result, it protects you against your human desire to engage in greedy activities.
Naked options also allow you, during a large selloff, to take ownership of market-leading stocks at discount prices so that you can participate in the upside of the stock.
I definitely believe that there is a time and place to BUY options. It's important to buy options to reduce portfolio volatility. However, I tend not to buy puts during periods of volatility.
Traders have a tendency to trade too many spreads. If their broker allows them to sell 2 naked options, then they will sometimes trade 20 vertical credit spreads and then take a massive loss because the underlying stock trades below the option that they sold and above the option that they bought.
They end up getting assigned those 20 contracts which is too large for their account and their broker ends up forcing them to close out that trade at a massive loss.
Vertical credit spreads are also difficult to roll / manage, however they are significantly more capital efficient than naked options.
If you're a disciplined trader (don't trade too many contracts and also close out your positions early) then trading spreads is fine.
Perhaps the biggest issue with spreads is that it gives people a false sense of security that they can trade a lot more contracts than they should be trading.
To be profitable, study this options trading example, sell a naked option (or sell spreads with a disciplined approach) with an expiration of around four to six weeks on market-leading securities.
You can then wait two or three weeks or wait until the option hits your profit target.
August 2020 Update
I now trade naked options only when the VIX is above 20. With the VIX below 20, I prefer to trade spreads
My primary reasoning is that spreads help protect against violent moves.
When trading vertical credit spreads, you can profit from the insurance that you purchased to the point where it can be quite profitable to hold a spread during a violent selloff.
Stock options trading requires substantial discipline, and there are usually 1 - 2 times a year where violent moves lead to large volatility expansion.
By trading options spreads, you're protected from these 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.
More About How to Trade Naked Options
Let's say you sold an option on Facebook when it was trading at $175 dollars. Then, let's say Facebook goes up to $185 dollars in two weeks.
With Facebook trading at $175, you could have sold a $158 put option and collected around $1 per share and premium.
Two weeks later, if Facebook is trading at $185 then that option is probably trading at 15 cents.
You've been able to receive 85% of the premium in just 1/3 of the option duration.
As a result, it's not an efficient usage of your capital to wait an incremental four weeks to simply collect 15 cents a share.
Close out that position and then scan your watch list to see if there is an opportunity for you to sell puts or calls in another position.
If one of those positions is trading at the low end of its trading range, then you sell an out of the money put and then you just simply repeat the process.
This is a put option example that falls within our options trading strategies. At BestStockStrategy.com we teach options trading for beginners and also for advanced traders.
That is the simple options trading example that has allowed me to reduce risk while trading options.
This same strategy will, hopefully, allow you to earn millions of dollars while 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.