Are you looking to make some extra income? The stock market is a great way to earn additional income. The most traditional way of investing is to buy stock from a publicly traded company. Although buying stock may seem attractive, there is another form of investing that is less capital intensive and yields greater return. This is known as options trading.
What is options trading? Options are contracts that allow the investor to buy or sell stock at a certain price at a certain time. The two types of options are call options and put options.
A call option is the right, but not the obligation, to buy stock at a certain price. A put option is the right, but not the obligation, to sell stock at a certain price. Options can be traded with calls, puts, or a combination of calls and puts.
Options only use a fraction of the capital compared to buying stock. Let’s say you want 100 shares of Stock XYZ at $100 per share. This would cost you $100,000. You can use options to do the same thing, except for a fraction of the cost.
Furthermore, trading options allow you to have many directional assumptions: bullish, bearish, or neutral, unlike stock which you can only be bullish. Let’s say if Stock XYZ was all at all-time highs. If the investor did not want to buy stock at all-time highs, he can short or be neutral the market with the use of options.
Another advantage to trading options is the high probability of profit. Generally, buying stock has a 50% probability of being profitable. By selling options, the investor can see 70 to 80% probability of profit, delivering consistent returns.
Let’s take a look at an example. SPY is trading at $247.84 per share. It would cost $247,840 to own 100 shares of SPY. The average yearly return within the last 5 years was 15%.
If you want to employ a bullish strategy, you can buy a covered call. This strategy is buying 100 shares of stock and selling a call option. The call option used in this example is the 248 strike with 45 days until expiration. By using this strategy, you would only use $7200 in capital with a max profit of $288 for 45 days. The yearly return on capital is 32%. Furthermore, the probability of profit is 58% compared to buying stock, which has a 50% probability of profit.
To learn more about options trading, visit Option Bible.