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Lesson 3: How to trade Options Profitably?

So you want to be a profitable trader!

I’m often asked how I manage to make a living out of trading. The truth is I don’t. I don’t make my living just out of trading, not all the time at least.
 
One of the reasons I see people fail, and fail terribly, is that they invest all their time, resources and funds into one activity.
 
Whether it’s trading or selling bananas on the side of the road, there’s an old adage the stands true – don’t put all your eggs in one basket.
 
As you shouldn’t put all your account balance into one position, you shouldn’t put all your money into trading alone. What you end up doing is putting unnecessary pressure on your trading and mixing emotion with strategy.
 
You might blame your lack of trading success on the fact that you have yet to come across some stunning strategy or analysis.
 
Let me tell you now, no one strategy or indicator is going to make you a rich overnight. 

Determine your objective

Options are a flexible investment tool that can help you take advantage of any market condition.

With the ability to generate income, help limit risk, or take advantage of your bullish or bearish forecast, options can help you achieve your investment goals.

trading types

It is important to answer why are you trading options in the first place.

Are you looking to hedge an existing position or are you speculating on the bullish or bearish nature of the underlying asset? Or are you looking to earn a premium by selling an options contract?

Before we explore Options Strategies, lets understand Options trading terminology:

  • Holders and writers: The buyer of an option is known as the holder, while the seller is known as the writer.
  • Premium: The fee paid by the holder to the writer for the option.
  • Strike price: The price at which the holder can buy or sell the underlying market on the option’s expiry
  • Expiration date/expiry: The date on which the options contract terminates
  • In the money: When the underlying market’s price is above the strike (for a call) or below the strike (for a put), the option is said to be ‘in the money’
  • Out of the money: when the underlying market’s price is below the strike (for a call) or above the strike (for a put), the option is said to be ‘out of the money’.
  • At the money: When the underlying market’s price is equal to the strike, or very close to being equal to the strike, the option is referred to as ‘at the money’
  • Break-even point: when the underlying market’s price is equal to an option’s strike plus premium (for a call) or strike minus premium (for a put), your trade is at its ‘break-even point’.

Selecting an options trading strategy

There are numerous strategies you can use to achieve different results when you’re trading options.

Some of the common strategies you need to know are:

options trading strategies
options trading strategy

Options Spreads

Spreads are when you buy and sell options simultaneously. Your maximum profit is the difference between the two strike prices. 

The break-even levels only apply if you leave your option to expire.

options trading spreads

Once you know the time-frame you’re going to trade, you need to determine whether you want to buy or sell a call or put option on the market you’re trading.

The type of option you trade, and whether you buy or sell, will depend on whether you want to speculate on the market rising or falling. Remember that buying options is limited-risk, while selling is not.

If you want to learn “How to earn consistent income from weekly Options?” check out the next lesson to explore more about our community & premium training programs.

Thank you

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