At Top Gun Options we often remind our readers that one can profit by trading options in rising, falling, and sideways-trading markets. We also preach the necessity of hedging against risk. A more basic question for anyone considering this business is why is option trading profitable? It takes a lot less effort to buy shares of an ETF that tracks the S&P 500, and, over time, the S&P 500 tends to keep going up. So, why go to the trouble of trading options?
Advantages of Trading Options
There are several good reasons to trade options. There are many risk-reduction strategies that options provide an investor. When dealing with rising and falling markets options give one the ability to control long or short positions with substantially less risk then when buying or selling stocks outright. There is an option strategy that offers profit and risk-reduction for virtually any market scenario. Options trading gives a trader the ability to leverage their trading capital. And there are options strategies that make money in markets that offer no profit to other traders or investors.
Are Options Risky?
When improperly used options can pose a significant risk to the trader. A basic example is that across the board those who sell options make more money than those who buy options. That being the case it might seem that the smart thing to do is simply to sell calls and puts on stocks and ETFs all day long. The problem is that, on occasion, the market moves unexpectedly and dramatically. An option seller who gets caught in such an unexpected price swing can lose years of profits in an afternoon. However, at Top Gun Options we preach to our students to always hedge their trades. In this way an option trader gives up a bit of potential profit in return for protection against catastrophic risk.
Options Trading Is a Business
A sad fact is that novice options traders using tools like the Robinhood App find it extremely easy to enter trades. However, this ease of trading does not come with better strategies, sufficient hedging of risk, or the ability to recognize a risky versus a less-risky trade. In fact, far too many novice traders end up treating option trading like a trip to an online casino, doubling down on losses, and falling prey to fear and greed to the extent that they trade on borrowed money and everyday court financial disaster.
Why Trade Options?
Basic reasons for trading options is that they can be very cost-efficient. When properly applied they are, in fact, less risky than other approaches to the market, the potential rate of return in an options trade can be substantially better than that gained by directly trading or investing in stocks. And there are many, many strategic approaches available within the options trading realm. When buying a call option on a stock that one expects to rise in price the trader pays a premium that is substantially less than the price of the stock. While the buyer of a call option has the right to purchase the stock in question at the strike price of the contract no matter how high the market price has gone, an options trader will typically exit their trade for a profit without ever holding the stock in question. The percentage profit on applied capital from such a trade can be significantly higher than if one had purchased and then sold the stock and the buyer of a call option does not lose money, aside from what is spent on the contract premium, if the stock falls dramatically in price.