Why Options Trading Is the Real Key to Wealth Creation

Options are less risky while offering a greater chance of higher returns. Here’s why options trading is an important route to financial security.

Contrary to common assumptions, options trading can be safer than regular stock trading, and much, much more rewarding.

If options trading isn’t already a part of your personal finance and wealth management strategy, this article ought to get you excited about it

We’ll talk about how options work, including the risks and benefits, and show you why options trading is the real key to wealth creation.

The Hidden Risk of Traditional Investing

Traders who only use long-term stock trading and mutual funds in their investment plan are missing a key component of wealth creation: time.

Let’s assume you’ve given yourself 20 years to build a $5 million net worth. That’s about 7,300 days, and you need to make every one of them count.

Now, let’s assume you have $20,000 tied up in a stock. The stock is bringing in a 6% or 7% return every year. Not bad.

But each year your $20,000.00 is making only 6% or 7% is another year you can’t use options trading to make %20 or 30% (or more) using that same $20,000.

Did you know that 2 out of 5 workers believe they won’t be retiring until they’re 70? Maybe it’s because they don’t take this “time cost” into account.

How Options Trading Solves The Time Cost Problem

Let’s assume you’re looking at a $40 stock called “ABC.” You expect it to go up, so you buy 100 shares, investing a total of $4,000.

If it goes up to $50 in the next 60 days, your $4,000 grows to $5,000, for a 25% return and a $1,000 profit. Not bad.

But, let’s assume you’d bought 20 call option contracts on that same stock. If you buy 90-day options, this might cost you the same $4,000 (this cost is called your “premium”).

But if the stock goes up to $50 within 60 days, your 20 call option contracts could be worth $20,000.

That’s a 500% return on investment, compared to a 25% return on investment over the same time period.

How Options Trading Works

When you buy an options contract, you’re buying the right to buy (or sell) the underlying stock at a set price (strike price) within a specific time period (expiration date).

For example, let’s assume ABC stock is selling for $40 and you buy a 90-day call with a $45 strike price. You’ve literally bought a contract which allows you to buy 100 shares of ABC any time within the next 90 days, and at the price of $45.

Now, imagine if ABC goes from $40 to $50 in the first 60 days of your options contract. You now own a contract which allows you to buy a $50 stock for only $45 any time within the remaining 30 days.  This makes your call contract more valuable than it was when you bought it.

Now, you simply close the position by selling your call contract at a higher price than what you bought it for.

Of course, the risk is that ABC stock will either go down or remain under $45 until the 90 days of your contract is up. In this case, your contract will only allow you to buy the stock at $42 or even $39.

If the 90 days end and the stock price remains in this range, your contract expires worthless and you lose your $4,000 premium. Thankfully, you can use options trading to reduce this risk and increase your odds of winning.

Why Options Trading is Safer Than You Think

We just talked about a “call,” contract, which gives you the right to buy 100 shares of the underlying stock at your strike price.

However, you can also buy a “put” contract, which gives you the right to sell 100 shares of the underlying stock at the strike price. This way, your options contract becomes more valuable if the underlying stock price goes down.

By combining calls and puts, you can create a lower-risk options trading strategy.  For example, let’s assume you pay a $4,000 premium to buy 20 calls on ABC stock, which is selling for $40.  Your call contract period is 90 days, and your strike price is $45.

You pay another $4,000 to buy 20 put contracts with a $35 strike price and a 90 day expiration period. Now you’re in for $8,000 premium instead of a $4,000. But, you also have two scenarios where you can make money:

  • SCENARIO #1: ABC stock rises from $40 to $50. You net $20,000 from your 20 call contracts. After subtracting your $8,000 premium, you have $12,000 in profit.
  • SCENARIO #2: ABC stock falls from $40 to $30. You net $20,000 from your 20 put contracts. After subtracting your $8,000 premium, you have $12,000 in profit.

Notice that this strategy makes money whether the stock price goes up or down. Your only risk is that the stock will hover between your $45 call strike price and your $35 put strike price for the entire 90 days.

This would make both of your contracts worthless, and you’d lose your $8,000 premium.  But here’s why this shouldn’t scare you.

The Secret to Smart Options Trading: Probability

Successful options trading isn’t about winning all the time. It’s not even about winning most of the time. It’s about leveraging probability. This is why every options trader needs a smart trading plan.

Imagine having a coin that lands on heads 50% of the time. Every time it lands on heads, you make $12,000. Every time it lands on tails, you lose $8,000.

Flip that coin 100 times, and you’ll have a net $80,000. Flip it 1,000 times, and you’ll have a net $800,000. This is the mathematical power of probability. Again, it’s not about winning most of the time. It’s about leverage.

The beauty of options trading is that the wins are big enough to make up for the losses, and then some. So, if you can win even half the time, you’ll still do very, very well.

Ready to Start Options Trading the Smart Way?

By now, you know that you can create multiple scenarios where you can make money trading options. But we’ve just scraped the surface.

We haven’t talked about covered calls, binary options, advanced spreads or the power of selling calls and puts instead of buying them.

Imagine if you can could an options trading plan that wins even 60% of the time, or 70%. That’s why options trading needs to be a part of your investing and wealth management strategy.

If you’re ready to leverage the power of options trading, or discover more interesting ways to make money and build wealth, you’re in the right place.   

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