This options trading FAQ is to answer many questions people have asked about trading options. Options trading was once considered a practice best reserved for financial professionals, but it’s become increasingly popular for individual investors over the years.
New and beginning investors have the potential to benefit from trading options and can use strategies to protect against risk and increase the potential for profit.
Keep in mind that trading options isn’t for everyone but it is worth some time to investigate incorporating high probability, options trading strategies into your portfolio. We have created this options trading FAQ page to help you find out if it’s right for you. Let’s take a look…
It can be difficult to explain but it is most commonly compared to buying insurance. I know buying insurance doesn’t sound exciting but stick with me for a minute, I will make this exciting and break the explanation down as simple as I can.
Options are traded against specific stocks, ETFs or indexes. Buying options is different from buying stocks because when buying stocks you are buying a piece of a company. When you buy options, you are buying the right to buy or sell the stock or ETF at a specific price by a specific time.
Here is where the options trading meets insurance is exciting. Imagine you just bought your dream car, maybe it is a BMW and you want to protect it right? So you buy insurance to protect the money you have invested in the car. The insurance cost is an expense to you to protect your investment.
Now think of this scenario where you bought 100 shares of Disney stock at $100 per share. You might want to protect that $10,000 Disney stock investment like you protected your dream car. You could buy a put option. This would give you the right, but not the obligation, to sell the Disney stock at an agreed upon price on or before a specific date.
Who will sell you the put option to? Any other trader who is willing to be paid to buy your Disney stock at the agreed price on or before a specific date.
How do I utilize options in trading? There are many ways but for our example we will continue with our current Disney stock scenario. You have 100 shares of Disney stock at $100 per share with a total investment of $10,000. Then you buy a $100 strike put option for $500 as insurance for your investment for a total investment cost of $10,500. Let’s see what happens when the stock price goes up or down with and without options.
Here are two examples:
Example 1 – Let’s say your Disney stock that you purchased for $100 per share, goes up in value to $125 in the future. You decide to sell the stock at $125 per share which would give you a $2,000 profit. The profit is calculated by taking the sale of the 100 shares of stock at $125 per share or $12,500 minus the total investment cost of $10,500. Click here to see the calculations.
In this example, if you hadn’t purchased the $100 strike put option you would’ve made another $500 profit, but the $500 is an expense to protect your investment. However there is always the chance the stock price will go down which is why you might want to consider protecting your investment. The next example might make you smile..
Example 2 – Let’s say that your Disney stock you purchased for $100 per share, goes down in value to $75 and you decide to exercise your $100 strike put option. This allows you to sell your Disney stock for 100 per share even though Disney is currently trading at $75 per share meaning in this case that you’ve recovered the original cost of your Disney stock purchase of $10,000 minus the cost of the $500 that you paid for the put option.
In this example if you hadn’t purchased and exercised the $100 strike put option then you would’ve lost a total of $2,500 if you decided to sell the stock at $75 per share. Was paying the $500 (insurance) cost to protect your investment worth it to you? Click here to see the calculations.
With options trading money can be made on either side of the put option. Of course there are risks associated with trading options but there are risks with trading stocks as well.
More good news with options trading is that you don’t have to own stock to trade options and the cost of trading options is a lot lower than buying stock. Options trading is all done virtually so transactions can happen very quickly and can be done from anywhere you have access to an online brokerage account. Even when vacationing at Walt Disney World!
Absolutely! We have a step by step process that is called the Trading Success Blueprint . This process can help a person with no trading knowledge to quickly trade a very simple rule-based strategy that virtually anyone can do. Depending on each person’s objectives, they can build off that solid foundation and go as far as they’d like. Even to a very advanced, professional-level complex options trader.
Click here to meet some successful traders who started as beginners just like you!
No, our trading strategies, for the most part, should be evaluated only once per day. The evaluation takes only minutes however if entries, exits or adjustments are required, then that would take additional time.
Selecting the right broker is crucial to trading success. We highly encourage every trader to carefully evaluate brokers based on the process below to provide the highest probability of trading success.
1. Make a list of which brokerage firms are supported in your country.
2. Determine which firms supported by your country are regulated by FINRA.
3. Account minimum required and margining requirements
4. Trading and analytical needs for your selected trading strategies
5. Clarity of the platform and ease of use
6. Commissions and fee structure
Click here to for links and further details on the broker selection process.
Right here! We LOVE to get questions about trading options and can answer them for you in many ways.
1. In the bottom right corner of your screen is our website chat. Please enter your question and we will get it answered.
2. Click here to enter a question in our contact form.
3. Post a question in one of the forums in the Locke Options Community. Click here to join our FREE basic membership.
4. Send your question in an email to firstname.lastname@example.org.
5. For very in-depth questions and one-on-one attention, please schedule a coaching session with one of our professionals.
If you are a monthly subscribing member, you have additional opportunities to receive live, detailed, lengthy answers in various ways:
1. Post questions or topics for discussion to the member only GO and PRO Skype groups.
2. Post questions or topics for discussion in the Options Trading for Income by the Guidelines sessions forum for the upcoming webinar or ask during the live webinar.
3. Post questions or topics for discussion in the GO Ask A Trader forum for the upcoming webinar or ask during the live webinar.
4. Receive live one-on-one coaching from a professional trader by request on a question or concern you have during a live GO Ask A Trader session.
5. Post questions or topics for discussion in the Trading With The Pros Sessions forum for the upcoming webinar or ask during the live webinar.
6. Receive live one-on-one coaching from our professional traders by request on any trading related topic during a live Trading with the Pros session session.
7. Post questions or topics for discussion in the Market Outlook Weekly Webinar forum for the upcoming webinar or ask during the live webinar.
8. Post questions or topics for discussion in the Trading Performance Sessions forum for the upcoming webinar or ask during the live webinar.
9. Receive live one-on-one coaching from a professional traders by request on a question or concern you have during a live Trading Performance session.
This is going depend on many, many factors and vary drastically from trader to trader. Are you going to stick with a straight rule-based conservative strategy? Or are you going to get subjective, put in the work, and go for it?
If you want to talk very general historical numbers just get an idea of what a singular type of options income trading might do, keeping in mind that some of this information is simulated, and that the future may be different than history…
Many of the profitable, conservative, rule-based income strategies currently available historically average between 20% and 30% per year over time. That’s an average with some years over 60% and some negative. And….this will hold true for just about any good rule-based, very high probability, non subjective strategy over time, regardless of where you find it, and regardless of what might be advertised. Which to some people may seem low but if you think about it, those numbers beat nearly any hedge fund or mutual fund out there. So it’s very impressive.
If you get into the more aggressive and minimally subjective strategies, like the Bearish Butterfly or the ROCK, effective traders can easily double those numbers. The ROCK historically has averaged near 100% per year as shown on our weekly Options Trading for Income webinars, but realize that it takes time, and a lot of experience to get to that level and, of course, the future can be quite different than the past.
If you decide to go fully subjective, then….. eventually, if you stick with it, it is possible to become more and more consistent in returns and do much, much better with returns. I’d say there are no limits, but again it takes time and a lot of experience to get there.
Yes! We suggest all students who are just beginning to learn options trading start with the classes in the Fundamentals in Trading library which is a benefit of our PRO and GO membership.
These trading lessons are specifically designed to make sure you have all the base knowledge that you need to trade one of the three trading strategies included in the library. It is not just about the trades and the options themselves but also about position sizing and the type of psychology that you’re going to need to be successful as a long-term trader.
Most people want to jump into an options trading strategy right away but realize that you are delaying your progress if you do not have the fundamental knowledge and basic understandings before you start trading.
It’s going to be more important for you as a trader to have the proper perspective, staying power, and mental mindset than it is to have a knowledge of a particular strategy. I know that sounds backwards but that’s really the way that it is because you can have the best
strategy in the world but if you don’t have this other base information, you’re going to tend to jump from strategy to strategy looking for the next next best thing and that usually
doesn’t help people reach their trading goals.