How to Do Options Trading For a Living
It is the dream of countless investors to do options trading for a living.A stock option is an instrument that gives you the right, but not the obligation, to buy a stock at a certain price for a certain amount of time no matter how high or low that stock ends up trading on the open market.There are two types of options: Puts and Calls. If you think the stock is going to drop in price you buy a Put. If you think the stock is going up in price you buy a Call.Since a very small movement in the price of the underlying stock can dramatically change the value of a stock's option, option trading has both its potential rewards as well as its risks.
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Things You'll Need
- A trading account which allows trading in stock options
- Some way of predicting market movements
Instructions
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How to Do Option Trading For a Living
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1
Divide the money in your trading account by 10 so that you are spending no more than 1/10th of your trading account on any one option play.
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2
Choose a stock and determine which way it is going to trade for the short term. Knowing whether a stock is about to go up or down is the key to trading options for a living. If you feel the stock is going up in value you will buy a Call option. If you feel the stock is going down in value you will buy a Put option.
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3
Choose a month for the option you wish to buy. Options expire on the third Friday of the month. In other words, January options expire on the third Friday in January, February options expire on the third Friday in February, etc. Determine how much time you need to buy in order for your stock to move enough to create the profit you desire.
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4
Choose a Strike Price. The Strike Price is the price at which you will be able to buy the stock any time up until its expiration regardless of how much it is trading for on the open market. For example, if you own a $20.00 Call option on a stock that has shot up in value and is now trading for $30.00 a share, you can buy that stock for its Strike Price of $20.00 and resell it for $30.00 and pocket the $10 per share difference. Or you can sell the option itself to another investor at a handsome profit.
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5
Watch your stocks and options carefully. A small movement in the price of the underlying stock can cause a huge price change in the option you have purchased. If you have predicted the movement of the stock correctly then the value of your option will rise as the stock's price changes. If you have predicted the movement of the stock incorrectly then your option will lose value each time the stock moves (in the wrong direction).Do not get too greedy. When you have a credible profit in an option position, sell the option, take your profit, and look for your next play.
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Tips & Warnings
Take some time and play options on paper for a while before investing real money in the options market. Unless you can predict the direction of stocks accurately more than half the time you stand a good chance of losing money in the options market rather than making it.. The real key to trading options for a living is to be able to accurately predict the direction of the market on a consistent basis.
