Options trading only looks complicated because there's no one way to do it.
But if you can find simple options trading strategies to follow, it can be as straightforward as stock trading.
Now, if you're new to options trading, make sure you check out our guide on everything you need to know to start trading options.
Today, though, we're taking it a step further to show a couple ways you can maximize profits trading options.
A big part of it has to do with lowering the risk of the options trade.
As a reminder, options trading can be risky, but there are also ways to substantially hedge that risk.
In fact, when you have a range of options trading strategies in your pocket, you can dramatically lower the risk.
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But options trading also can come at greater reward than other investments.
When you consider the profit potential behind options - turning a 5% or 10% movement into 50%, 100%, or more - the opportunity cost shrinks as well.
You just have to know what's going on around you and how to take the appropriate action.
So here are two real-life examples of basic strategies that will help you play solid chess with options contracts.
Options Trading Strategies: Buying a Call
Back on May 22, 2017, iShares Russell 2000 (NYSE: IWM), an ETF tracking the Russell 2000, traded for $137. Money Morning options trading specialist Tom Gentile's research found IWM was likely to go up in price in less than a month.
And the stock did go up - to $141.46 - by June 2, a modest 3.3% gain.
He could have bought 100 shares for $1,370 on that May date and profited 3.3% a few days later. That would have been $446 on his initial investment.
But he knew a better way.
Tom bought a call option with a strike price of $135 for $3 per share. Since options are sold in bunches of 100 underlying shares, it brought Tom's bill to $300.
Already, he was in a better position than if he had bought the stock, because he didn't have to spend over $1,000.
But he also knew that this strategy could earn him significantly more money than simply buying the stock.
When the stock added that 3.3% two weeks later, the value of his options contracts went from $3 to $7.20. He was able to turn around and sell those 100 contracts for $720.
Subtracting his $300 investment from the $720 left him with a profit of $420, or a 140% gain. Compare that to a 3.3% gain from just buying the stock.
Tom also could have purchased the stock for his strike price, $135, when IWM reached $141.46. And he could have sold the stock for a 4.7% gain.
That's still not quite 140%.
But other successful options trades have landed investors triple-digit profits.
Here's how Tom Gentile essentially made hundreds appear out of nowhere using another options strategy.
Options Trading Strategies: Selling a Put
Put essentially means "sell" in contrast to how call means "buy." When you buy a put option, you buy the right to sell a stock at a chosen strike price.
This next options strategy doesn't exactly involve selling a contract you already own, but actually writing the contract. And this is a play that can be made through your everyday broker. Here's how Tom did it to make hundreds of dollars with little up-front cost.
On April 2, 2018, AMZN was trading for $1,371.99 a share. That's pretty expensive for one stock.
But again, Tom Gentile knew the best way to control shares of a stock without buying it: trading options.
He believed Amazon.com Inc. (NASDAQ: AMZN) stock would either gain or stay flat over the next few days. So he was willing to make some extra cash selling puts.
Only this time, instead of buying an option, he would be the one writing it. That means he wouldn't have to buy it to begin with-he would just collect the premium for selling it.
Since AMZN put options sold for $1.75 per share, Tom knew he could make $525 up front by selling three contracts ($1.75 x 100 shares per contract).
Tom's goal was for this contract to expire worthless, letting him collect the $525 premium as pure profit. In this case, AMZN stock would have to stay above $1,200 - the strike price - for that to happen.
Under the contract, if the buyer was correct and AMZN was headed to $1,200 and below, Tom would buy 300 shares of Amazon at the strike price.
But AMZN stock moved as Tom had expected. It went up 4.3% over the designated time period, which meant the options expired worthless, and Tom kept the premium for himself.
And this ended as a profit of $575 for Tom.
Even in a losing situation, Tom would have had 300 shares of one of the best long stocks around.
But the most remarkable thing here is how sure Tom was that the stock would likely go up in that time interval.
With this trade, he was just putting years of charting and trading experience to good use - the kind of knowledge only financial elites have access to.
But today, Tom Gentile wants to share this knowledge with you. He's pulling back the veil to show you how he knew Amazon was likely going up - and more importantly, how to make options trading a lot less complicated.
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About the Author
Mike Stenger, Associate Editor for Money Morning at Money Map Press, graduated from the Perdue School of Business at Salisbury University. He has combined his degree in Economics with an interest in emerging technologies by finding where tech and finance overlap. Today, he studies the cybersecurity sector, AI, streaming, and the Cloud.