In this ultimate options trading for beginners guide for 2025, you're going to learn all of the basics you need to know about trading options.
This guide will teach you how to profit consistently.
Remember that profitable trading is a habit, requiring discipline and patience.
If you'd like an in-depth course, then you're welcome to visit this link to learn more about my option trading strategy courses.
For a quick recap, we were up 138% in our small account, and 35% in our large account, in 2023.
Our 2024, on a YTD basis, has also been great!
If you've been following my blog and YouTube channel, you know that my preferred strategy for consistent stock market gains has been selling option premium.
But even the best-laid plans can hit a snag.
That's where debit spreads and proactive hedging come into play.
Debit spreads let us capture directional movements while limiting our risk; and by selling options, we collect premium that allow us to finance the long-term hedges so that we're protected against those black swan events that can blindside even the most experienced traders.
In 2025, I'll be sharing even more strategies to help you navigate the market, whether you're a seasoned pro or just starting out.
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Options Trading Guide: What You Need to Do to Succeed
In order to get started trading options, you need to set up your account. I personally use E*Trade, but any legitimate broker can be used.
In another post on this blog, I discuss the best online brokerages for trading newcomers.
Remember that you can oftentimes 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 (defined risk trades).
When trading, it’s imperative to focus only on the most important information, that's why I only focus on a few tickers.
There are two types of options: puts and calls that we have at our disposal.
In general, we are put sellers, although we buy options during specific periods to hedge our portfolio, reduce portfolio volatility and when capturing directional moves.
If XYZ is currently trading around $130, we can sell a $120 put option with an expiration of 3 weeks out and collect about $100 per contract.
If I wanted to turn this trade into a vertical credit spread, we can sell the $120 put and buy the $110 put.
By purchasing the $110 option, we're defining the risk of this trade, and our maximum loss will be the width of the strikes ($10) less the credit that we receive.
Option Trading Tips: How Good Traders Earn Money
We Only Trade the Most Stable Securities
We Hedge Our Positions and Buy Options
We Do Not Trade Often and We are Loss Seeking
Options Trading Guide: Define Your Watchlist
These are the securities that are currently on my watchlist.
1) Amazon is a market-leading stock and one of the largest companies in the world.
2) 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.
3) SPY and SPX I trade the index because it's diversified and I also use it for hedging purposes.
4) 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.
5) Visa and Mastercard are the gold standards in the payment processing industry.
We ignore EVERY other security that's not on our watchlist. We focus on quality securities with strong brands, or indices.
The best way to avoid losing positions is to not trade speculative securities.
There are a few other securities on my watchlist, however these are solid choices to start with!
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Should You Trade Naked Options?
Should you trade naked options?
It depends.
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.
Selling naked options also 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 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 help protect traders during periods of extreme volatility.
I prefer to sell naked options if I want to take ownership of the underlying stock, or when VIX is elevated.
By taking ownership of the underlying security, traders can then run the wheel strategy.
How to Deal with Losing Trades?
One of the most important skills to learn as a trader is how to accept losses.
Traders have loss aversion, which makes it difficult to close out losing trades.
To counteract loss aversion, it's best to be loss seeking and build a habit of closing out losing positions that you are concerned about.
By doing this, you'll avoid small losses from turning into large losses - which is one of the most important rules of being a profitable trader!
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What Should You Do As a Beginner Trader?
The goal for beginner traders is to establish good habits and not lose money.
How much money do you need to sell options? Small accounts with less than $10,000 or $15,000 can earn consistent profits with options trading.
Even if your account has a minimum of $2,000 you can target a return of about 2% a month by trading options.
When trading a small account, it's important to trade vertical credit spreads.
Once you open a new trade, we can submit a buy-to-close limit order with a "time in force" of "GTC", which is a good-to-cancel, so that we can avoid having the order expire for 60 days.
By submitting a buy to close order after selling a vertical credit spread, you're setting up that position to close when it hits your profit target.
In conclusion, this is how to earn money by trading options.
Thank you for reading this comprehensive options trading guide. If you have any questions, please leave a comment below.
Frequently Asked Questions (FAQs) - Ultimate Options Trading Guide
What's The Best Options Trading Course?
You can enroll in our trading course by me, David Jaffee, which goes into significantly more depth and is much more comprehensive.
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 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.
You can also run the wheel strategy on securities that you own.
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 2025 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.