Over the past decade, online derivatives trading has exploded in popularity. In the first half of 2021, the Futures Industry Association (FIA) reported the total number of traded futures and options contracts reached 28.9 billion, up 32.1 percent year-over-year. Of this total, exchange-traded options accounted for much of the action. It’s an obvious point, but buying and selling options is a popular way to make money trading derivatives.
For most market newbies, “how much money can you make trading options” and “is it possible to make a living trading options” are popular questions. Ultimately, the answer to each depends on your desire, resources, and expertise. If you have all three of these attributes, then you, too, can make money trading options.
Options 101: Composition and Risk
An options contract gives the holder the right, but not the obligation, to buy or sell a quantity of a product on a predetermined date at a set price. Stocks, currencies, and futures all serve as the basis of options contracts.
The best way to make money with options is to avoid costly mistakes! If you’re going to make money trading options, it’s best to first get up to speed on the basics.
Types of Contracts
Options come in two varieties: calls and puts. You can buy or sell each type, either to take a position in a market or to generate cash flow.
If you buy a call (bullish) or a put (bearish), then you’ve effectively opened a long or short position at market. If you sell or “write” a call or put contract, then revenue is collected from the premium.
The price at which each contract may be exercised is referred to as the strike price. Accordingly, how to profit from put options and call options is based on the current price’s position with respect to strike. As the market fluctuates above and below strike, the contract gains or loses value relative to the long or short position taken.
To earn money trading options over the long haul, it’s imperative that a trader consistently buy or sell contract strike prices shrewdly.
When buying a call or put, the only risk assumed is the premium paid for the contract. In contrast, selling options entails being exposed to a potentially unlimited downside.
How to Make Profit with Options: FAQs
If you’re wondering how to make money trading options, you’re not alone. Here are a few of the most common FAQs in this area:
How do call options make money?
Call options give the holder a right to buy an asset at a specific price in the future. If you buy a call option, you’re taking a long position in the market. The key element of how to make money in call options is this: If the price rises above the strike price, the trade is profitable. If not, the contract expires worthless.
In the case of selling a call, how call options make money is based on the collected premium. If price remains below strike, you keep the premium; if not, you’re liable for the difference.
Is making money buying options easy?
Yes and no. The physical act of buying options is simple and can be accomplished with a few clicks of a mouse. However, when you buy a call or a put, you’re going long or short the market from your strike price. If price rises above a call strike or falls beneath a put strike, gains may be realized. If not, the call or put expires worthless, and the premium you paid is lost.
How much money can be made by trading options?
This is truly the billion-dollar question. In reality, an options trader’s potential is limited only by their savvy, dedication, and available capital. If you have the time, money, and expertise, then the sky’s the limit!
Make Money Trading Options
Unfortunately, there’s no “holy grail” when it comes to profiting in options trading. The basic tenets of successful trade apply―to profit, you must align risk and reward within the structure of a comprehensive plan. The strategies below are two examples of how people make money trading options:
- Straddles: A straddle is a strategy designed to capitalize on a directional move in price. When executing a straddle, a trader buys a product’s call and put with identical strike prices and expiration dates. As the market deviates from strike, profits are gained. The straddle gives the trader a potentially unlimited upside while risking only the premium.
- Spreads: A spread trade is the simultaneous buying and selling of put/call options. It is a net-value strategy, meaning that offsetting positions are taken to limit risk and lock in a reasonable profit. Calendar, bull, bear, and diagonals are a few popular spread strategies.
Can you make money trading options? Absolutely. If you’re an active trader, then consistently making money with options strategies like the ones above is certainly doable.
How to Make Money with Options
At this point, you may be asking yourself how soon you can start to make money trading options. Although we admire your enthusiasm, it’s important to understand that options trading can be complex and that it involves risk.
If you want to make money trading options, then developing effective ways to approach the market is a must. A great way to begin is by checking out our free Futures & Options Trading Strategies guide. In it, you’ll discover 21 futures and options trading strategies and other insights to get you started.
This blog was originally published March 7, 2019 and has been updated for accuracy and comprehensiveness.