The probability of buying a stock at one price and selling it for a higher price is about 50/50.
Even if you do succeed with stock options, you’re only likely to earn about 7% a year before taxes.
Listening to all of the stock market talking heads may cause you earn less money because they oftentimes encourage you to trade aggressively and assume more risk.
With options trading, specifically selling options, you’re able increase your probability of profit and win up to 98% of your trades.
David Jaffee of BestStockStrategy.com dispels many myths about stock option trading in his online options trading course, blog, and YouTube videos.
Too many traders play a guessing game, relying on chance instead of patience, skill and probabilities.
If you want to successfully trade stock options, you’ll need the best strategy and a lot of discipline.
Keep reading to learn more about stock options trading, including options trading strategies and options trading examples.
Stock Options Trading 101
Whether you are new to stock options trading or a seasoned pro, it is important to review the basics.
While investing in the stock market is largely seen as a gamble, the right options trading strategy can help you profit more consistently, like the casino, instead of as a gambler.
In order to become a profitable options trader, you do not need a college degree or years of training.
By studying the basics of stock options trading and applying the best strategy, you can make money by trading options.
What is stock options trading?
Options trading can seem daunting if you are new to the concept, but it’s relatively easy to understand.
With an option contract, the buyer has the right to buy or sell the underlying asset at the strike price on or before the expiration date, but they are not obligated to do so.
The option seller collects a premium by agreeing to buy or sell an underlying asset at the strike price on or before the expiration date.
Key Terms for Stock Options Trading:
- Put options: Options contracts that give the owner the right, but not the obligation, to sell a certain amount of an underlying security at the strike price on or before the expiration date. The option seller is obligated to buy the stock at the strike price on or before the expiration date.
- Call options: Options contracts that give the owner the right, but not the obligation, to buy a certain amount of an underlying security at the strike price on or before the expiration date. The option seller is obligated to sell the stock at the strike price on or before the expiration date.
Is day trading profitable?
Day trading is a popular topic when it comes to stock options trading, but day trading is not profitable.
Most day traders lose money because it’s difficult to predict price action by identifying patterns.
Humans have a tendency to look for patterns, even when none exist.
One of my Cornell University professors, Thomas Gilovich, conducted a study on basketball players and the “hot hand”, where humans assigned patterns and looked for streaks even when the statistical evidence was contrary to their beliefs.
Humans are easily fooled by randomness and subjects believed that a player who hit multiple shots in a row were “hot” and more likely to sink the next shot. In reality, they were more likely to miss the next shot.
Fooled by randomness is a problem because it leads to many people trying to find patterns using complicated technical analysis, which oftentimes causes them to lose money.
In fact, a study concluded that less than 1% of day traders earn more than minimum wage: https://www.zmescience.com/science/news-science/day-traders-earn-less-minimum-wage-052352/
By selling option premium, traders have a very high probability of profit.
David Jaffee graduated from an Ivy League university, spent years in investment banking, and runs a successful options trading business.
Traders are much better off selling option premium because it’s possible to win ~98% of your trades.
Options Trading Strategies
David Jaffee teaches his students to make money in the stock market by selling insurance.
The way to consistently make money in the stock market is by collecting premium.
Selling option premium is similar to selling a car insurance policy.
When you sell the policy and the driver does not have an accident, you get to keep the entire premium and collect more premium when the first policy expires.
Collecting option premium is the best options trading strategy because it puts the probabilities in your favor.
You can win up to 98%+ of your trades while learning how to mitigate risk for the 5% of trades you may lose.
Options Trading Examples
If Facebook is trading at $350 per share, a trader can receive money by agreeing to buy Facebook at $300 by selling a put with a $300 strike price and an expiration date of three weeks.
For example, you could earn $2 per share, which equals $200 for a single contract, for agreeing to buy Facebook at a price that’s $50 less than its current market price.
A longer expiration date, like six weeks, would result in you collecting more premium (perhaps $3 / share, instead of $2 / share).
The seller of the option is now obligated to buy Facebook at $300 for three weeks if it falls below that price.
If Facebook falls to $300 per share, your net break-even cost is $298, or the current market price less the $2 of premium that you collected.
In the worst-case scenario, you will buy Facebook stock at a lower price.
However, about 95% of the time, Facebook will not drop below the strike price.
When Facebook shares do not fall below the strike price on or before the expiration date, you are no longer obligated to purchase Facebook shares and you get to keep the $200 you collected in premium.
Options Trading for Beginners
If you want to learn how to be profitable with stock options trading, David Jaffee offers the resources you need.
In his comprehensive online options trading course, David Jaffee breaks down the best options trading strategy.
Learn how to win up to 98% of your trades by visiting BestStockStrategy.com today.