President Franklin D. Roosevelt famously said, "The only thing we have to fear is fear itself."
He was promoting optimism during the Great Depression, but this still applies to investors today.
Do not fear the markets. Do not fear the news cycle.
And do not fear using options.
Anyone can learn options trading. We'll show you how you can grab retirement by the horns and settle down with a fortune.
For many individual investors, options might seem "too hard" or "too risky." But that's far from the truth.
Some investors treat it like it's rocket science. They devise complicated options strategies using multiple types of options. But you don't have to.
You can use basic options strategies to boost your income, multiply your trading returns, and grow your account faster than you ever thought possible.
Have 28 Seconds? You could make $2,353 - and you won't need to buy a single share of stock up front to collect this cash, or spend a nickel on anything. Click here to learn more...
But there is a catch. This does take some work.
The good news is that anyone can learn the basics. After learning the basics, you practice without using real money, and then slowly put your plan to work. And as you get more comfortable, you can take bigger risks. Or not. You use stock options at your own pace and at your own level of skill.
Your 3-step plan, No. 1: Education
The first step towards success with options is learning. You must know how to identify the parts of an options contract and what they mean.
The good news is there are only a few to master.
Options give the holder the right, but not the obligation, to buy or sell a fixed amount of the underlying stock or index at a fixed price by a fixed date.
If you own a call option, you have the right to buy the underlying stock. If you own a put, you have the right to sell the underlying stock.
Here is a simple example. An XYZ company call option with a $55 strike price expires on Oct. 18, 2019. It has five key parts:
- Name: XYZ company is the underlying stock
- Type: call or put
- Strike: the agreed upon price to buy or sell the underlying stock ($55 in this example)
- Expiration date: Oct. 18, 2019
- Premium: the price of the option before commissions
That's fairly straightforward, although perhaps some of the terms are new to you.
The real fun happens when you decide which option is right for you. Which combination of strike price and expiration will give you the result you want?
Here is where we introduce "the Greeks." These are Greek letters that represent calculations related to options.
Professionals spend a lot of time figuring this part out to hone their strategies to the penny. But you don't have to. All you need to understand are the basic characteristics they describe.
Sensitivity to stock price movement (delta) - The more "in the money" an option is and the closer to expiration, the more the option moves with the price change of the underlying stock.
Time decay (theta) - Options naturally decay in value over time. The farther away from expiration, the more time value in the option. But that value declines every day.
Intrinsic value - No Greek letter here, but this is an important number. Intrinsic value tells us how much the option would be worth if it expired today. It is a measure of how much the option is "in the money" or "out of the money." It's the difference between the underlying stock's price and the option's strike price.
Out of the money options have zero intrinsic value. That's where a call option strike price is above the stock's price or a put option strike is below the stock's price.
The higher the stock's price is above the call option's strike price, the greater the intrinsic value.
And the converse is true for puts. In that case, the lower the stock's price is below the strike, the greater the intrinsic value.
Other - Options are also sensitive to changes in volatility (vega). The more volatile the underlying stock, the more an option will cost. That's because it is more likely to expire in the money.
Interest rates also factor in, but for our purposes we can set them aside. Now, here's how you can begin to master these...
Your 3-step plan, No. 2 Practice
You can practice your strategies on paper without risking any money. Some options trading platforms allow you to trade in "practice mode." That will get you all the experience of real trading without the worry.
But even if you do not have access to such a platform, you can follow your strategies on your own. Let's say you like Apple Inc. (NASDAQ: AAPL) stock after its recent new product release. You can follow along to see how different strike price and expiration combinations perform over the next month or so.
How do Apple options perform compared to options of a less "sexy" stock, such as a retailer or energy stock? Do you have to change the strike and expiration combinations to make them profitable?
Once you get a handle on these things, you're ready for the big leagues...
Your 3-step plan, No. 3: Do It!
Remember, you can start small. And you do not have to trade every day or every week or every month. Whatever is comfortable for you is the best plan.
However, once you see how options can multiply your returns over simple stock trading, you will be hooked. Just keep in mind that options, as with all trading, can also turn up some losing trades.
Stay focused, stay humble, but do not fear the market.
We at Money Morning are big fans of options, and we've been encouraging all investors to learn to profit with them.
Here are some of our recent guides and strategies:
- Options Trading for Beginners: Your Complete Guide
- How to Make Money Trading Options in 2020
- Three Simple Options Trading Strategies for Making a Fortune in the Market
Good luck, and remember, you can do this! Start slowly, build your confidence, and then enjoy your success.
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