Options trading can deliver some of the biggest gains in the entire stock market.
Take me, for example…
Even better, last year I took a small account from $10,000 to $130,000+ in just over two months … all thanks to the power of options trading.
Now, consider that the stock market delivers roughly 10% returns … per year.
That makes the gains from options seem pretty attractive, right?
While I agree, there’s a catch…
The options I trade are theoretically risky. If I’m not correct on the direction and timing of the price swings, my contracts can lose 30-50% of their value overnight.
This is because options aren’t stocks … they’re contracts that represent the right to buy (or sell) a stock at a certain price.
Keep reading and I’ll remind you of three important factors to consider before you start trading options…
1. Options Contracts are Depreciating Assets
The first point to understand is that options contracts are depreciating assets that often expire worthless.
If your contract doesn’t hit its strike price by its expiration date … it’s a zero.
But this isn’t a good reason to avoid trading options altogether.
Most traders fail. Most companies fail. But you don’t hear these points made in criticism of common share traders on any given company.
The difference is this — with the high risk that comes with buying options, the possibility of massive rewards comes as well.
In my opinion, this is a pretty even trade-off.
I’ll gladly keep betting small and conservatively with the potential of hitting massive home runs in the options market.
Sure, my contracts can theoretically go to zero. But only if I mismanage the trade.
2. You Can Lose Money Faster with Options
If you’re reckless and undisciplined, you can lose money a lot faster on short-dated options contracts than you can trading shares.
Most companies aren’t regularly at risk of going bankrupt, which is what it would take to bring a stock to zero.
Options, on the other hand, are constantly depreciating. Time decay will eventually take every contract that doesn’t exceed its strike price to zero.
But you can also make 500%-1000% gains on weekly contracts if you nail the timing and direction.
As always, risk/reward is a trade-off…
That said, what stocks go 5x or 10x in a week? Only equally risky penny stocks. It all evens out in the end.
The bottom line is this…
If you want to open your trading up to these kinds of mind-blowing gains, you also have to expose yourself to an elevated level of risk.
REMINDER: This is why I’m always stressing the importance of only trading the best setups!
As an options trader, you need to be more selective than common-share scalpers.
First, the setups need to be perfect…
Then, it’s up to you to trade them to their maximum potential.
3. Option Pricing is Complex
I often get questions from students about how options are priced.
For example, they’ll wonder why their 50% out-of-the-money calls are down when the stock is slightly green.
When you’re trading stocks, the only thing that affects the share price is the number of buyers and sellers — the bid and the ask.
If there are more buyers than sellers, the stock goes up. If there are more sellers than buyers, the stock goes down. It’s that simple.
But options pricing isn’t as straightforward.
And if you’re coming from trading stocks, it can be difficult to grasp why certain contracts are up or down.
That’s because a variety of different factors (that don’t apply to stocks) influence the overall value of options contracts…
Don’t be overwhelmed by the complexity of these numbers.
In the beginning, all the data can seem overwhelming.
But if you take things one step at a time and study hard, there’s no reason you can’t confidently trade options.
Trading isn’t for everyone — and options trading is reserved for even less.
But if you’re ready to study harder than anybody else, you could be one of the courageous few who succeeds as an options trader.
So, ask yourself … which camp do you choose?