More people than ever are learning how to trade options. But knowing the basics of options trading is only half the battle: You need to know how to find the best options trades to make money.
That's exactly what you'll find here.
We'll show you the simple steps you can take to find profitable options trades.
Plus, we'll also show you the best options trades you can make right now, courtesy of the options experts here at Money Morning.
Speaking of experts, here's Money Morning's options trading specialist, Tom Gentile, with a brief overview on what makes options trading so phenomenal, plus why this is one of the best places to learn the ropes:
Options are exploding in popularity because retail traders have seen their profit potential.
Stock options give you the right to buy or sell shares of a stock by a certain date. Since you don't actually own the stock, just the right to buy or sell it, you can control many more shares of the stock for a fraction of the price of owning them outright. That's called leverage. And it lets you amplify the profit potential of stock trades far beyond what you would see from simply buying and selling shares.
For even more detail on how this works, make sure you check out our guide on how to trade options.
What many new traders have found out the hard way is that there's more to making money with options than buying a call on a stock you like and waiting.
You need to find the right combination of a stock, the strike price of the option, the expiration date, and the cost of the contract to consistently find profitable options trades.
Here's how you can do it.
While there are a nearly limitless combination of options traders can use to create a strategy for any situation, we want to focus on finding trades using simple calls and puts.
There are three elements to key in on to take your trading to the next level.
Find the Right Strikes and Expirations
There are many variations of strike prices and expiration dates for every stock with options. A one-sized rule is nearly impossible.
But a few guidelines can help you find the best options.
First, look for strike prices just out of the money.
Options already in the money will be very expensive and that will cut into your potential gain.
Options far out of the money will be much cheaper, but the stock will have to move dramatically in order for you to make any money.
The best idea is to look for options one or two strikes out from the stock's trading price. This will give you the best combination of affordability and potential to hit.
Second, look for expiration dates three to six months out.
This is a broad rule since six months can be a lot of time, but you likely don't want to tie up your money any longer than that. And plenty of traders make good money with weekly options, but you'll want expert help before you dive in.
Similar to finding the right strike price, expiration dates nearer the current date will be cheaper if the options are out of the money. But you have little time for the stock to move, raising your chances of losing money. And if the option is in the money, close expiration dates will be very expensive.
Options with expiration dates far away will be more expensive since the stock has more time to get in the money too.
But an expiration date three to six months out is the sweet spot between giving the trade time to work – the stock moving into the money – and affordability, lowering your risk and maximizing your upside.
Trade Liquid Options
One of the most important factors new options traders overlook is liquidity in the options market. Liquidity simply means there are many buyers and sellers for a particular options contract. That means prices are accurate, and most importantly, you'll be able to sell your options contract when the time comes.
When the market for the specific options you're looking at isn't liquid enough, it means the price you see on you trading screen might not be the price you end up paying. It may even mean there are no sellers at all for the contract, meaning you can't enter the trade.
It also means that when you buy the contract, you may not be able to sell it. Imagine buying a call option on a stock that soars higher, seeing a profit on your trading screen, and not being able to sell the option for a profit.
The way to find options with liquidity is to look at the bid-ask spread. Options with close spreads are typically liquid enough to trade. If you see a wide range, or a range that includes $0, then the option is unlikely to be liquid.
That may eliminate little-known stocks from your plans, but that's all for the better. As Money Morning's options trading specialist, Tom Gentile, says, "98% of stocks and ETFs out there simply aren't worth a single penny."
But "the big banks and brokerage firms want you to gamble your money on all of them," says Tom.
That's why looking for liquid trades can go a long way toward making your moves more profitable.
Manage Your Risk
Options are great at helping you trade while lowering your risk, but that can go out the window if you aren't careful.
First, make sure you use limit orders when buying and selling options.
The options market can be fast-moving, and using a market order could mean you end up paying more for a trade than you initially expected. It may also mean you sell your contracts for less than you hoped. But using a limit order can make sure you get into and out of trades at the price you want.
Second, don't chase trades.
You may be dying to open a position on a particular option and see that your limit order isn't filling. Stay disciplined, and don't change your entry point just because the market isn't cooperating.
"If you do, you could end up buying at the high or near the high of the day only to see the markets calm down and the option prices start coming down," Tom tells us.
Third, stick with your plan.
Set aside a percentage of your portfolio you'd like to use for options trading and stick to it. It's tempting for traders, especially new traders, to make a ton of trades and chase bad money with good. That's only increasing your risk.
Tom tells us a simple strategy to managing your risk is to keep your risk the same on each trade. Even if you feel like the trade is going to be a home run, don't be tempted to increase the money you're putting in. Stick to your plan.
And never trade with money you can't afford to lose.
Options trading is fast-paced, so you'll need to act quickly when you find the right trade. Not only do options change price as the expiration date nears, but changes in the underlying stock price can cause options prices to shoot higher or lower.
That means if you're looking for options trading recommendations, you can't rely on an idea that's out of date, even if it's just a few weeks.
Here at Money Morning, we publish options trade ideas multiple times a week.
You can find our latest trades right here…
You can use a stock’s support and resistance levels to identify channels and better predict how a stock’s price will behave.
For example, horizontal channels mean a stock is trending sideways.
But channels can also trend up or down, and learning to spot them will help you identify potentially profitable options trades.
We've talked before about the importance of support and resistance when looking at a stock chart. They come up a lot during the normal course of options trading.
They're incredibly important indicators of where a stock price might (or might not) be headed.
Today, we're going to take a look at another way you can use support and resistance to identify potentially profitable options trades.
Starting next year, three of the biggest exchanges in the United States will no longer allow investors to place stop-loss orders on their trades.
So what are you - the average retail investor - to do? How are you supposed to protect your capital and your profits?
Let me offer you a few considerations that will help you (and the capital in your account) survive this move by the major exchanges.
In options trading and investing, as with any business you're in, you want to turn a profit.
When things are going great and profits are coming in, the business is thriving. When things take a turn for the worse, your winners come less frequently, and your profits become smaller.
That's when things can get really ugly. But just like in any business, it is how you deal with losses that matters.
When trading options, there are several factors that affect price - not just the value of the underlying asset.
The variables that exist that account for the fluctuations of an option's price movement are known as the options "Greeks," and we've covered many of these.
I've told you that delta - how an option's price will move with price movements in the underlying - is the single most important factor in determining an option's price.
Today's "Greek" shares a special relationship with the delta. I like to call it the "delta accelerator."
Here's what I'm talking about...
Volatility has a huge impact on options pricing, and you need to understand the mechanics of how that happens and what it means for your money.
This options trading lesson is crucial - you'll learn how to find stocks with a chance to make big moves... and how to identify potentially lucrative options plays to profit on those moves.
We're going to explore in detail the "Greek" that measures changes of an option's value based on how much the implied volatility on the underlying security changes.
A Money Morning reader recently wrote in and summed up what we often hear: "Options scare the heck out of me."
It's common for investors to think options are too risky for them. That's why many never bother to try.
But the options trading strategies I teach you can reduce risk by up to 90% compared to if you bought the underlying stock. And in 2008, when many lost 50% of their savings to the stock market plunge, options could have reduced that loss to 10%.
The markets will do whatever they want. It is not what happens in the markets that will make or break you. It's how you deal with what the markets do after you make your entry decisions that will set you - and your profits - apart from others.
My goal is to have you learn exactly what options can do for you. Understanding the potential reward as well as the risk can help you overcome your fear. I'll show you the proper principles and rules to follow so you know what to do and what not to do.
There's one eensy number that every pro trader checks out when they're doing their "homework" before picking a trade.
They clean up on those trades, and now, so will you...
You see, we know that the options on the stocks that have a $0.05 or less bid/ask spread, like you find on the CBOE Penny Pilot list, give you the best chance at making the most money on the smallest price moves.
And we know that picking an option with the lowest "percent to double" gives you an easy shot at doubling your money when you want that to happen.
But now I want to show you how to use one number to pick the options that will move in your favor when the stock you're trading moves in price before you enter the trade.
What's the true measure of a trader's success?
Last Tuesday, I told you that two of the most important things you can do as a trader is to build a plan for every trader, and to stick with that plan through the end of the trade.
But before you can build an effective options trading plan, there are three rules you need to consider.
Let me show you what I'm talking about...
There is an old adage that traders are told to live by that goes, "Plan your trade and trade your plan."
There should be a follow-up to that one that says, "Stick to your plan no matter what."
Beginning and experienced traders alike seem to get something in their heads that makes them change their original trading plan.
That's one of the worst mistakes a trader can make. Here's why...
The mindset of short-term options trader is to get in, get out, and turn profits quickly - typically, the more efficiently you can use your capital, the better.
But for those from a long-term, buy-and-hold background, this short-term, options-based way of generating income can be a lot to take in.
So today, I'm going to show you a long-term options trading strategy sure to boost your portfolio...
A lot of folks - especially individual investors - don't like to bet on stocks that are going down. That's understandable. It doesn't feel as good to bet against something.
But it would be prudent for investors to hedge their gains of the last five years; trees don't grow to the sky, especially when their roots are rotting.
Many of the options trading strategies I have shown you have been directional trades. That means the option position requires the underlying stock to make a particular move in price - either up or down - for the trade to work.
But how would you like a strategy that allows you to place a trade that doesn't care which way it moves, just so long as it moves?
That's what I'm going to show you today...
FedEx Corp. delivers "the world on time" to its customers and slow, steady growth - along with a $0.25 dividend - to its shareholders.
In fact, in 1983, it became the first American company to pull in more than $1 billion in revenue without any mergers or acquisitions, and it's been outperforming ever since.
FedEx makes a good, if expensive, foundational holding, but its $44 billion market cap, low volatility, and 282.3 million shares make it close to the last stock you'd ever expect to double your money quickly, let alone in less than three weeks.
But thanks to the easy, inexpensive trade I'm about to show you, that's exactly what happened.
Here's how we were able to turn a modest move up in FedEx shares into a 100% gain...
Directional traders assess the direction of the broader markets or individual securities and then trade accordingly. So what strategies do directional traders use?
Today, I'm going to show you a simple options trading strategy that allows you to target lucrative opportunities... and it relies on a tool we've talked about a lot in recent weeks: the simple moving average.
