Saturday, August 24th, 2019

Making a Living Trading Options

November 25, 2009 by T.D. Thompson  
Filed under Options Trading Tips


If you make your living trading options you spend your days following the markets and learning sophisticated techniques to measure risk and opportunity. You will have the time and can learn the expertise to engage in straddles and naked call options. If you do not work at trading options full time and do not have the expertise in trading options to work straddles or the stomach to do naked call options be very careful. In trading options you can make a lot of money and, because of the leverage involved in trading options you can lose your shirt.

If you want to make your living trading options you will start by learning the terminology and the basic four trades. These are to buy or sell call options and to buy or sell put options. Trading options in all four ways can be done “covered” or “naked.” That is to say, you can own the stock in which you are trading options or you may not. If you do not own the stock you will need to have equity in your trading account for trading options in most cases.

Much of learning about trading options is “pencil and paper” work. You need to follow examples, learn the mathematics of trading options, and practice without really risking your money before considering straddles and naked call options, not to mention options in general.

The mathematics of trading options are, first of all, that when you sell an option you receive a premium. The premium is based upon what the market believes is the value of the option. Secondly, what you are trying to predict and make a profit on is the spread, or lack of spread, between the stock price on the contract, the strike price or exercise price, and the spot price, which is the market price if the options contract is exercised

If you are to engage in options trading for a living you need to understand that an option can expire unused, unexercised. An example of an unexercised contract in options trading is when someone owning a stock sells a call option. In options trading this gives the buyer of the contract the right to buy the stock at the strike price, which or she will do if the spot price goes up over the strike price by more than the cost of buying the stock. If the stock does not go up the buyer does not buy and the seller pockets the premium while retaining the stock.

Once you are firmly in charge of how and why the various basic ways of trading options work and the mathematics behind them you need to move on the business of predicting the market moves of the underlying stocks for which you are trading options. As in trading stocks directly a good rule of thumb is to know a very few stocks very well and confine your options trading to familiar territory. Beyond that one can get into very abstract mathematics such as “Ito’s Lemma,” to predict risk in options trading. Unless you are a college math professor you probably don’t want to get into equations such as dXt = αtdBt + Utdt.

Straddles have to do with using puts and call simultaneously on the same stock. Naked call options and other “naked” trading mean that you trade without owning the stock. This can be very profitable once you are firmly grounded in the basics of options trading and know the intricacies of long and short straddles. Naked call options can work if you are continually in touch with the markets and have protected yourself against downside risk with strategies such as a long straddle.

More to come.

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