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Trading Options On the Stock Market

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Written by Timothy Sykes
Updated 3/31/2023 10 min read

Options trading is one of the major trading niches that traders specialize in. Lately it’s become more popular than ever. Even if you don’t trade options, your knowledge account will be lacking if you don’t understand the discipline.

I don’t trade options, but my former student and current Challenge mentor Mark Croock does. He’s implemented my penny stock strategies into options trading. That’s how he’s made most of his $3.9 million in career earnings.

Options trading is very different from penny stock trading. There’s an entirely new learning curve, and it can be overwhelming if you don’t know what you’re doing.

Still on the fence about getting into options trading as a beginner? Read on to learn more!

How Does Options Trading Work?

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Options trading works by speculating whether an asset’s price will rise or fall by a certain amount, after a specified amount of time. Essentially, you’re “betting” on the movements of a stock — and profiting if you get it right.

Options are derivatives of actual stocks, meaning an option doesn’t have any value of its own. Instead of holding its own value, an options contract gives you “the right to buy or sell a stock at a predetermined price within a certain period of time.” Like stocks, you get access to options trading through your broker and various trading platforms.

Options trading involves two parties: the holder/option trader and the writer/option seller. When you trade options, you pay the option seller for the right to trade a stock for a certain price by a certain date.

The money you pay to get an options contract is called a premium. If you don’t do anything with your contract, the only money you’ll lose is the premium.

The price where the option becomes executable is called a strike price.

Why do traders love options trading? Here are some common reasons:

Provides Trading Flexibility

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When you trade penny stocks, you need to own the underlying asset at some point. With options trading, you can decide whether or not to go through with the stock trade based on the current price information. If the contract’s expiration date passes without you doing anything, the option simply becomes null and void.

Options exist for a range of investment vehicles, from stocks and indices to commodities and foreign currencies.

Has Built-In Risk Limitations

If you don’t cut losses quickly when you buy a stock, you might have to sell at a significant loss. When trading options, there’s less of a risk — you can choose not to go through with the trade.

The only thing you’ll lose is your premium and nothing else, in contrast to the much larger losses you can incur when trading actual stocks.

Rewards Good Speculation

I teach my Trading Challenge students to never try to predict the market, react to it instead. I don’t want my students believing in a stock — I want them to trade good setups with a high degree of confirmation, and cut their losses if a trade goes against them.

The exception is in options trading. Options trading rewards good hunches about a stock’s future moves. Smart options traders like Mark can trade on speculation because an incorrect options idea doesn’t penalize them as much as a dumb stock bet.

If your prediction is right, you can safely buy or sell the stock. If you get your trade wrong, you’ll lose a fraction of the money you would if you actually traded the stock.

Call Options

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When you buy a call option, you’re essentially getting the right to buy a stock at the specified price.

For instance, let’s say you think a $3 stock in Company Y will rise by 20% some time in the next two months. You’d buy a call option to purchase 100 shares of Company Y’s stock at $3.60 per share.

When you buy a call option, you pay a premium to the seller. If Company Y’s stock price jumps to $6 per share before your contract is up, you can buy shares at the $3.60 strike price and sell them for the difference.

If Company Y’s stock price drops, you can ignore the option and only lose your premium.

Use Cases of Call Options

You’ll benefit the most from a call options contract when you expect a stock to rise in price — you can lock in a lower purchase price and sell it for a profit.

Put Options

A put option is the opposite of a call option. It gives you the right to sell stock at a certain strike price.

For instance, you can get a put option to sell 100 shares of a $3 stock in Company Y two months from now if you think it will trend down. The strike price would be under $3 on a put. You would be able to sell (or short sell) your optioned shares for $3 each — then immediately buy them back at the lower price.

Use Cases of Put Options

Since put options require you to own the underlying stock when they execute, they are more complicated than calls. If you already own shares in the optioned stock, you can use your own shares to exercise the option. If the stock price goes up, you can just sell your shares at a profit without exercising the option. This strategy is called “hedging.”

If you don’t own shares in the underlying stock, it’s often more profitable to just sell the put. This is because the remaining time value can also be monetized.

How to Trade Options Effectively

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While options trading differs from penny stocks, the same basic framework applies:

  • Don’t follow anybody else’s picks
  • Study successful traders’ options strategies
  • Create your own watchlists and trading plans
  • Track your trades

Becoming a great options trader is a marathon, not a sprint. Winning or losing your trades isn’t the only point. You want to make sure that your trading technique is improving everyday.

Not willing to sacrifice money on mistakes? Paper trading is a great way to get your feet wet. It won’t teach you how to deal with your emotions when real money is at stake though…

I think the best way to learn any trading strategy is to learn from those who have more experience than you. Find a trading community on Discord or elsewhere to share experiences and learn from like-minded options traders.

Want to learn options trading from the best? Sign up for Mark Croock’s Evolved Trader program now and learn from one of the only options traders I trust!

American vs European Options

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American and European options are just trading terms for different types of options contracts (there are also Bermuda options if you want to get really technical).

The most important difference between American and European-style options is that European options can only be exercised on the expiration date. American options can be exercised anytime within the expiration time frame, which makes them more valuable.

American and European options are both available on stocks traded in the U.S. But you won’t get a choice between them when you’re taking an options contract…

American options are the dominant options contracts for stocks and ETFs. European options are more common in index-based options contracts.

Short-Term Options vs Long-Term Options

Depending on your trading style and risk appetite, you can choose between short-term options and long-term options contracts.

Short-term options expire within days or weeks. You might buy these in advance of forthcoming news, like an earnings call or product announcement. They’re typically riskier but cheaper.

Conversely, long-term options can last six months or more. They’re usually more expensive, as they give the underlying stock more time to hit its strike price.

Key Takeaways

Options trading involves some degree of speculation, but it also has some risk limitations built into the concept. My former student Mark Croock bases his entire trading strategy in options trading, and he’s one of my most profitable students ever.

If you’re interested in getting into options trading, make sure it fits your general trading strategy and can help you reach your goals. As with penny stock trading, never copy another trader — learn from them so you can develop your own strategy.

Trading Options on the Stock Market FAQs

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This article is just the tip of the iceberg. Here’s a bit more…

Is options trading better than stock trading?

I don’t think options trading is better than stock trading. I believe in keeping trading simple, and options trading can get really complicated… Ultimately, you need to look at how either style fits your trading strategy and will help you reach your goals.

Is stock options trading worth it?

Stock options trading can be worth it — just ask Mark Croock. Any trading strategy can help you reach your goals. Just make sure you’re tracking your trades and keeping your risk tight.

What type of option is the most profitable?

Any kind of options strategy can be profitable as long as you understand it and have put in the study time. If you don’t know where to start, learn from experienced options traders like Mark as you develop your own trading strategy.

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Author card Timothy Sykes picture

Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (888) 878-3621 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”