Trading options is not a risk-free investment method. However, trading options can still be a great way to earn money by following Wendy Kirkland’s strategies.
Options traders can gain by becoming buyers or option writers. It is possible because the prices of assets such as stocks, currencies, and commodities are continually changing. There is an options strategy by Wendy Kirkland that can be used regardless of market conditions.
Options contracts and the strategies that use them define your profit and loss account; you need to understand how much you earn or lose by studying them closely.
When selling options, you can get the most out of the premium price charged, but often, there is unlimited negative potential.
When you buy an option, your profit may be unlimited, and you lose the cost of the option premium.
Depending on the adopted option strategy, you can profit from various market conditions, such as bullish, bearish, and horizontal market.
Find out other helpful and beneficial methods of profitability by Wendy Kirkland.
Basics of Option Profitability
Assume the real goods or services increase above the strike value until expiration. The call option investor would make a profit in that situation. If the price is lower than the strike price until it drops, the put option holder will benefit.
If the underlying stock price remains below the strike price, the call option writer will profit. After writing the put option, if the price remains above the strike price, the trader will profit.
Check out binary options trading and how it works here!
Option Buying vs. Writing
Option buyers can get significant returns on their investment. It is because the share price may well exceed the strike price.
If trading options is profitable, the return for option writers is relatively small. No matter how much the shares go up or down, the writer’s income is limited to the premium.
So why should you go for write options? Because under normal circumstances, option writers are very likely to be benefitted. A study by the Chicago Mercantile Exchange (CME) in the late 1990s found that just over 75% of all held-to-maturity options were worthless.
Evaluating Risk Tolerance
It is a simple risk tolerance test to determine if you are a buyer or seller of an option. Suppose you can purchase or write 10 deals for call options, and the value of every option for calling is $0.50.
Each contract usually has 100 shares as an underlying asset, so the cost of 10 contracts is $500 ($0.50 x 100 x 10 contracts).
However, the probability of trading options profitably is very favorable at 75%.
So unless you realized there was a 75% possibility of losing your investment and a 25% chance of benefit, would you sacrifice $500?
Maybe you want to earn up to $500 and know there is a 75% chance of keeping all or part of the amount and a 25% chance of becoming a loser.
The answers to these questions will help you understand your risk tolerance and make yourself a better buyer or seller of options.
Check out these steps to pick option stocks from here!
Option Trading Tips
As an option buyer, your goal should be to buy the options with the most extended maturity possible to give you time to trade.
On the contrary, when writing options, please shorten the expiry date as much as possible to limit your liability.
Try to find a balance between the above points of view by buying options, buying the cheapest possible options.
You can increase your chances of profit. The implied volatility of such low-cost options may be very low.
While this indicates that the probability of a successful trade is low, the implied volatility and option prices may be underestimated. Therefore, if the transaction is successful, the potential profit will be huge.
As shown in the previous example, there is a trade-off between the strike price and the expiry of options.
For example, when announcing clinical trial results for a significant drug, biotech stocks are usually sold with binary products.
Of course, writing or selling biotech stocks connected with such events will be extremely risky. Unless the implied volatility level is not so high, the premium income can compensate for this risk.
It does not make much sense to buy or sell large amounts of funds from industries with low volatility, such as utilities and telecommunications.
Take advantage of the option to trade one-off events like company reorganizations and spin-offs and recurring events like profit releases.
For example, before a stock earnings report with significantly lower scores, buying cheap stocks at currency purchase prices can be a profitable opportunity.
If it manages to overcome lowered expectations and then rises sharply, it will be a promising strategy.
Selecting the Right Option
Here are some general tips that can help you figure out the type of option to trade.
Bullish or Bearish
Are you bullish or bearish in the stock, industry, or market you want to trade? If so, are you crazy, moderate, or just a little bullish/bearish? Let us assume you are very determined on a hypothetical ZYX stock that costs $46.
Volatility
is the condition of the market volatile or is it calm? What about ZYX stocks? Suppose the implied volatility of the ZYX is not very high (for example, 20%). In that case, it may be a good idea to buy a stock call option, as such call options can be relatively cheap.
Strike Price and Expiration
Since you are very optimistic about the ZYX, you should be able to buy the call options you have sold. Suppose you don’t want to spend more than $0.50 on each call option, and you can choose to buy with a call option price of $49 for two months at $0.50, or a call option with a call option price of $50 for three months, the price is $0.47. You choose the latter because you think the slightly higher strike price could be offset by the extra months that expire.
What if you are only slightly up on the ZYX and its volatility implied is at 45%, three times the market as a whole? In that case, you can consider writing short-term put options to get an income that is more premium instead of buying a call option as before.
Summary
More advanced methods such as put and call options should only be used by sophisticated investors with sufficient risk tolerance. You have the option to tailor your strategy according to your risk tolerance and return requirements, as they provide multiple ways to make a profit.
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