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If you want to earn fast profits, the easiest and most effective way is by trading options.
But if you've been hesitant to try options, maybe it's because you've heard that options trading is risky.
The truth, though, is that options aren't as risky as you might think.
First off, there are different kinds of options trading, with different levels of risk. In fact, some option trades are designed to lower an investor's overall risk.
Secondly, and more importantly, any worthwhile trading strategy involves techniques that can reduce the risk of trading options while also boosting your profit potential.
It's that profit potential – the reward – that makes options trading worth it.
But before we talk about how you can make money trading options, let's talk a little more about the risk…
Options Trading Risk Explained
If you're buying call and put options, it's pretty simple: You can't lose more than you pay up front.
And because options for any given stock typically trade for pennies on the dollar, you'll be putting up less than you would if you bought the stock outright.
Even the worst-case scenario is pretty unlikely. You can close your position when the price doesn't go your way without losing too much.
But the potential profits from buying options are limitless.
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That's why you don't have to hit a home run every time. One or two successful option trades can make up for a handful of bad ones and then some.
So just like with stocks, the key is to spread your risk out. Don't put all your eggs in one basket, and you won't get burned by a trade or two going the wrong way.
If you're selling options, on the other hand, the risk factor does go up. That's because you can only collect the amount of the premium up front. But if the price goes in the buyer's favor, you could be on the hook for considerable losses.
But even then, it depends on your strategy.
If you sell a covered call, for example, then you already own the stock in question. The worst that can happen is that you're forced to sell the stock at a less-than-optimal price.
That's not ideal – and it's something you'll learn to avoid – but it's not going to ruin you, either.
So, as any good options trading guide will tell you, different strategies come with different kinds of risk. And the risk of any given trade is something you'll want to keep in mind as you execute your strategy.
Of course, there's something else you'll probably want to keep in mind too…
How much money you can make with options.
Is Options Trading Worth It?
The real advantage to trading options is leverage.
Take Southwest Airlines Co. (NYSE: LUV), for example. At the time of writing, Southwest stock trades at $55.31 per share.
But an at-the-money call option that expires in one month costs a mere $1.70 per share.
So for just $510, you could control 500 shares with options contracts. If you bought the stock outright, that would only buy you nine shares.
If you were more confident that Southwest was going to rise, you could buy out-of-the-money options with a strike price of $60. At just $0.23 per share, that $510 would give you enough options to control 2,200 shares. Plus, there'd be some change left over.
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When the underlying stock price moves in your favor, it pays off at a much higher rate than if you just bought the stock.
Take the price difference in those two options. There's only a $5 difference in the strike price, and yet the at-the-money option is worth more than seven times as much as the out-of-the-money option.
That's the benefit of leverage. A small move in the underlying security can mean a huge profit for you.