In this ultimate options trading for beginners guide for 2024, you're going to learn all of the basics you need to know about options trading this year.
This guide to trading options is a beginner's explainer that's going to teach you how to profit consistently. Remember that profitable trading is not about knowledge (as I teach in my option trading strategy); it requires discipline and patience.
2022 was a difficult year, with the S&P down almost 20%. As of September 2023, the S&P was up around 13%, although recently it seems that the market has been under pressure. In 2023, the VIX has traded as low as 12.5 (which is extremely low) and, in general, VIX has mostly traded below 16 for the majority of the year.
If you’ve been following my blog and YouTube channel, you know that the best way to earn consistent profits in the stock market (with high statistical probability) is to sell option premium. By selling option premium, you act like an insurance salesman or a casino. You are taking high probability bets that have an 80% - 90% chance of earning you a profit.
But, are you guaranteed to make a profit on every single trade? Of course not. You'll need to mitigate your risk and not trade too aggressively when the market behaves irrationally.
I am going to teach you some of the best options trading methods for 2024 that should help even the greenest traders earn a substantial profit.
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Options Trading Guide: What You Need to Do to Succeed
In order to be able to sell option premium, you need to set up your account. I personally use E*Trade, but any legitimate broker can be used for options trading.
In another post on this blog, I discuss the best online brokerages for newcomers to trading. Remember that you can negotiate commissions with your brokers by calling them. Sometimes, they will offer you free signup bonuses.
You should also ask them for the ability to sell naked puts and calls. If they don’t allow you to sell naked options, that’s completely fine. We oftentimes use verticals & spreads.
It’s imperative to focus only on the most important things. I try to limit information and I only focus on a few tickers.
My watch list contains: Amazon, JP Morgan, Mastercard and a few other stocks, indices and ETFs. For the most part, I try to target stocks and ETFs that do well during major selloffs and bear markets.
There are two types of options: puts and calls that we have at our disposal.
In general, we are put sellers, not buyers because the probability of profit is significantly higher when selling premium (although we buy options during specific periods to hedge our portfolio and reduce portfolio volatility).
Amazon is currently trading around $130 (as of September 21, 2023), so we can sell a $120 put option with an expiration of 3 weeks out and collect about $100 per contract.
The VIX is trading around 17.5, after increasing around 16% today, but it's still relatively low, which is why the available premium on the Amazon trade is low.
In this example, I would sell the $120 put and buy the $110 put on Amazon.
As another example, Mastercard is currently trading around $403 - we can choose to sell the $370 strike that expires in 3 weeks and collect around $85 for every put option.
However, you'll be able to collect MORE premium by being patient and disciplined and waiting for the underlying stock to fall, or for volatility to increase.
Since Amazon is currently trading at around $130, you may be better off by waiting to until Amazon falls to around $120, and you can then sell $110 put. You can also wait for volatility to increase, which will allow you to collect more premium.
An example of my options trading activity can be found in the video below.
Option Trading Tips: How Good Traders Earn Money
1
We Close Out Our Trades Early
2
We Only Trade the Most Stable Underlyings
3
We Patiently Wait for Great Opportunities
"This is how we earn our money. We close out our trades early, we only trade the most stable underlyings, and we patiently wait for great opportunities to arise." - David Jaffee, BestStockStrategy.com
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Options Trading Guide: Why I Chose These Stocks?
Amazon is a market-leading stock and one of the largest companies in the world. Lockheed Martin is a defense contractor, which has a lot of benefits to it. One of the benefits is a predictable revenue stream because it has a lot of government contracts.
When I worked in investment banking, we always loved seeing predictable revenue streams because it removes uncertainty from the equation. When there’s uncertainty, there’s volatility, which can oftentimes lead to losses for options sellers. SPY and SPX I trade the index because it's diversified and I also use it for hedging purposes.
TLT a bond fund is oftentimes uncorrelated to the S&P 500 and it also moves relatively slowly, making it easy to roll and manage positions. Visa and Mastercard are the gold standards in the payment processing industry.
If we were to have a recession, these are the stocks & indices that I would target. You would also want to sell the call side. What that means is, if the S&P 500 goes up ~50 points, you would then want to start selling calls to fade the rallies.
So, if we were in a recession and if Amazon is currently trading at about $130, you would wait for it to trade to ~$140 and you would sell a call option with a strike price of around $150.
Should You Trade Naked Options?
It depends - and I go much deeper into this more in the option trading education course. But, in general, spreads are preferable because they're more capital efficient and they also mitigate tail risk. However, I like selling naked options if my goal is to take ownership of the underlying security.
Plus, selling naked options maximizes the amount of premium received. People often worry that they'll sell a naked option and then the stock will go bankrupt - but the stocks, indices or ETFs that we trade will not go bankrupt.
A much bigger risk is trading too large and then being forced to close out positions at an inopportune time. I definitely believe that individuals with accounts below $20,000 should trade vertical credit spreads.
Additionally, I believe that when the VIX is trading below 20, everyone should trade vertical credit spreads to protect against a rapid volatility expansion. Spreads helps protect traders during periods of extreme volatility.
Let’s observe the prior trades from a spread perspective: If Amazon is currently trading at $130, trades down to $120, we would then sell a $110 put and buy the $100 put.
You can apply the same logic to all the rest - SPY, TLT, JP Morgan, and Mastercard. Remember: if there’s an opportunity for you to sell puts, that means that it’s not a good time to sell calls.
In the situation above, we’re only selling a $110 put. So, if Amazon drops down to around $120, we’re not going to sell the $150 call because we’re not going to collect enough premium.
In this situation, we would opportunistically turn this position into a strangle (by selling a call) only if Amazon appreciates in price. If Amazon is currently at $130 and then it trades up to $140, we would then sell the $150 call while also buying the $160 call.
Therefore, we’re creating a vertical credit spread on the call side (call credit spread). If you combine that with our vertical put credit spread, then we would have an iron condor. In this particular example, we are opportunistically entering into an iron condor because we would be short both a call credit spread, as well as a put credit spread.
These trades will allow you to be profitable on 90% - 95% of your trades - we target a monthly return of around 3% by selling premium.
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What Should You Do As a Beginner?
The goal when learning from this options trading guide is to be consistently profitable when trading.
How much money do you need to sell options? Small accounts with less than $10,000 or $15,000 can make a profit with options trading. Even if your account has a minimum of $2,000 you can target a return of about 3% a month by trading options.
When entering new positions, I would highly recommend immediately entering a buy to close order. In our previous example with Amazon, we would wait for it to trade down from $130 to $120. Then, we would sell a $120 put and buy a $110 put (we would be short a $120 by $110 put spread).
Let’s say we’re able to, for example, collect $.80 per share for a $120 / $110 put spread. In that case, once the order fills, we would immediately enter a buy-to-close order with a limit price of $0.40.
Once we have this position open in our accounts, we would submit a buy-to-close limit order. The time in force is GTC, which is a good-to-cancel so that we can avoid having the order expire.
By submitting a buy to close order after selling a vertical credit spread, you're setting up that position to close at a 50% premium capture rate. As a result, on a net basis, you would keep $40 for every spread contract that you sell and which closed at 50% profit (less a small commission).
In conclusion, this is how to earn money by trading options. We close out our trades early, we only trade the most stable underlyings, and we patiently wait for great opportunities to arise.
Thank you for reading this comprehensive options trading guide. If you have any questions, please leave a comment below.
Frequently Asked Questions (FAQs)
What's The Best Options Trading Course?
You can enroll in our trading course by me, David Jaffee, to go into significantly more depth with options trading. The course teaches you how to be profitable in all market environments, even market crashes.
There are also various free options trading courses you can use, including this very blog.
Do you recommend any option trading books?
I recommend these options trading books.
What is the best stock strategy?
The best stock strategy is to sell put options on stocks that you want to own. Then take ownership of those stocks if the options expire in-the-money.
By doing this, you'll be able to purchase stocks at a discount while also participating in the upside potential of the stock.
Is buying options profitable?
Yes, it can be, but it's important to buy options with longer durations and during periods of extremes. Buying put options during periods of complacency and low volatility will protect your portfolio.
Whereas buying calls during bear markets, after a large sell-off, can provide very large returns.
What is the safest option strategy?
The safest option strategy is to sell OTM put options on large-capitalization stocks with strong brands.
Then you can take ownership of the shares if the strike price expires in-the-money.
By doing this, you can participate in the upside of the stock.
Also, buying protective put options during periods of complacency, and buying call options during bear markets, is also a safe way to profit when trading options.
Should I use an option trading simulator?
I wouldn't recommend using an options trading simulator because many of them are not reliable. Even so, I would recommend using a paper trading account to get comfortable with the trading brokerage software and to test your option trading strategy.
Will 2024 be a good year for the stock market?
No one can predict the future. It's best to watch the price action of the stocks on your watch list and set up your portfolio in a way that protects you from large volatility expansion events.