How To Make Money with Options

Trading options is complex and exciting at the same time. With the rise of cryptocurrencies such as Bitcoin, there has never been a better time to delve into the opportunities that option trading offers. In this guide, we will explore the ways of making money with options trading. We will cover various strategies for beginners to help you succeed in this potentially lucrative venture.

Key Takeaways

• Grasp the fundamentals of option profitability and the different types of options;
• Evaluate your risk tolerance before engaging in options trading;
• Discover the advantages and disadvantages of options trading;
• Familiarize yourself with options spreads and choosing the right option;
• Develop a plan, consistently educate yourself, and understand risk management.

Basics of Option Profitability

Before diving into the strategies, it's essential to understand the fundamentals of how to make money with options trading. Essentially, options trading allows you to speculate on the future price of a cryptocurrency, such as Bitcoin. By purchasing or selling options, you can make money when the price of the asset moves in your favor. However, it's important to note that making money trading options is not a guarantee. Understanding the various factors that contribute to option profitability is crucial to success. In the following sections, we will discuss these factors and their impact on options trading.

What Are the 4 Types of Options?

Options come in four main types: buying a call, buying a put, writing a call, and writing a put. Each type has its advantages and disadvantages, and choosing the right one depends on your strategy and market outlook. We will discuss each type in detail, explaining how they work and the potential outcomes of each.

Buying a Call

Buying a call option gives you the right, but not the obligation, to purchase a cryptocurrency at a specified price (the strike price) before a certain date (the expiration date). Thus, if the price of Bitcoin rises above the exercise price, you can make a profit by exercising the option and then buying Bitcoin at a lower price.

The potential profit is potentially infinite, as there is no cap on how high the price of Bitcoin could rise. However, if the price does not exceed the strike price, the call option will expire worthless, and you will lose the premium paid for the option.

Buying a Put

By contrast, a put option gives you the right to sell an asset at the exercise price before the expiry date. Thus, if the price of Bitcoin falls below the strike price, you can make a profit by exercising the option and selling Bitcoin at the higher price.

Similar to call options, your potential profit is theoretically unlimited, as there is no floor on how low the price of Bitcoin could fall. However, if the price remains above the strike price, the put option will expire worthless, and you will lose the premium paid for the option.

Writing a Call

Writing a call option involves selling the right to buy an asset at the exercise price to someone else. In return, you receive a premium from the buyer. If the price of Bitcoin remains below the exercise price, you can keep the premium and make a profit. However, if the price rises above the strike price, the buyer may choose to exercise the option. In this case, you will be obligated to sell Bitcoin at the lower price, potentially incurring a loss.

The risk associated with writing a call option is potentially infinite, as there is no cap on how high the price of Bitcoin could rise. Thus, it is important to carefully consider the potential risks when writing a call option.

Writing a Put

Writing a put option involves selling the right to sell an asset at the strike price to someone else. As with writing a call option, you receive a premium from the buyer. If the price of Bitcoin remains above the exercise price, you can keep the premium and make a profit. However, if the price falls below the strike price, again, the buyer may opt to execute the option. Then, you will be bound to buy Bitcoin at a higher price, potentially incurring a loss.

The risk associated with writing a put option is limited to the exercise price minus the premium received, as the price of Bitcoin cannot fall below zero. Thus, it is essential to carefully consider the potential risks when writing a put option also.

Option Buying vs. Writing

As we have seen, there are four main types of options: buying calls, buying puts, writing calls, and writing puts. Each has its advantages and disadvantages, and choosing the right strategy depends on your market outlook, risk tolerance, and investment goals. Buying options allow you to profit from price movements in the underlying asset with limited risk and potentially unlimited rewards. However, the options can expire worthless if the price does not move in your favor, resulting in a loss in the amount of the premium paid.

On the other hand, writing options can generate income through the collection of premiums but carries potentially significant risks if the price moves against your position. Thus, it is crucial to carefully evaluate the potential risks and rewards of each strategy and select the one that aligns with your overall investment goals.

Evaluating Risk Tolerance

Before engaging in options trading, it is essential to evaluate your risk tolerance. Options trading can be risky, with the potential for significant losses if the price of the base asset moves against your position. Thus, it is crucial to understand your risk tolerance and be prepared to accept the potential losses that may occur.

To evaluate your risk tolerance, consider the following factors:

• Investment goals. What are your overall investment goals, and how does options trading fit into your strategy?
• Financial situation. Can you afford to lose the money you invest in options trading?
• Time horizon. How long do you plan to engage in options trading, and how does this affect your risk tolerance?
• Experience. How experienced are you in trading options, and do you have the knowledge necessary to manage the risks involved?

By considering these factors, you can better understand your risk tolerance and choose strategies that align with your investment goals and risk profile. Remember, options trading is not suitable for everyone, and it is essential to be honest with yourself about your risk tolerance and financial situation.

Reasons to Trade Options

There are several reasons why investors choose to trade options, such as:

• Hedging. Options can help protect your investments by limiting potential losses. For example, by purchasing a put option, you can protect your Bitcoin investment from falling prices.
• Speculation. Trading options allows you to profit from market movements without owning the base cryptocurrency, such as Bitcoin. This can be particularly attractive in volatile markets, where prices can change rapidly.
• Income generation. Writing options can generate additional income by collecting premiums. This can be a useful strategy for investors seeking to generate regular cash flow from their investments.
• Diversification. Options can provide exposure to different assets and strategies, helping diversify your portfolio and reduce overall risk.

Advantages and Disadvantages of Trading Options

Options trading has its benefits and drawbacks. Some advantages include:

• Flexibility. Options offer various strategies and risk profiles, allowing you to tailor your investments to your needs.
• Leverage. Options trading can provide significant leverage, enabling you to control a large position with a relatively small investment. This leverage can magnify your gains but also your losses, so it's crucial to manage your risk carefully.
• Limited risk. When buying options, your potential losses are limited to the premium paid for the option. This allows you to know the maximum amount you can lose before entering a trade, providing a level of risk control.
• Income generation. As mentioned earlier, writing options can generate income through the collection of premiums, which can be particularly appealing to income-focused investors.

However, there are also some disadvantages to consider:

• Complexity. Options trading can be complex and challenging to understand, particularly for beginners. Thus, it's essential to educate yourself thoroughly and gain experience prior to diving into options trading.
• Risk of loss. While buying options limits your potential losses, there's still a risk that your options will expire worthless, resulting in a loss of the premium paid. Additionally, writing options can expose you to possibly significant losses if the price of the underlying asset moves against your position.
• Time decay. The value of an option decreases over time, particularly as it approaches its expiration date. This time decay can erode the value of your options, making it harder to profit from your trades.
• Liquidity. Some options may have low trading volume, making it difficult to buy or sell them at favorable prices. This can impact your ability to enter or exit trades and potentially affect your profits.

Options Spreads

Options spreads are advanced trading strategies that involve simultaneously buying and selling multiple options with different strike prices or expiry dates. These strategies can help manage risk, generate income, or take advantage of specific market conditions. Some common options spreads include:

• Vertical spreads. These spreads involve buying and selling options of the same type (calls or puts) with the same maturity date but different strike prices. Vertical spreads can be used to profit from price movements while limiting risk.
• Calendar spreads. They involve buying and selling options of the same type and exercise price, but with different expiration dates. Calendar spreads can be used to profit from changes in volatility or time decay.
• Iron condor. This strategy involves selling an out-of-the-money call and put option while simultaneously buying a further out-of-the-money call and put option. Iron condor can generate income with limited risk and are used when you expect the base asset to remain within a specific price range.

These are just a few examples of options spreads, and there are many more to explore. When implementing these strategies, it's essential to understand the risks involved and ensure they align with your overall investment goals and risk tolerance.

Selecting the Right Option

Choosing the right option for your strategy can be a complex process.

Here are some factors to consider when making your decision.

Bullish or Bearish

Your market outlook will determine whether you should buy or sell calls or puts. If you are bullish on Bitcoin and believe the price will rise, you may want to buy a call option or sell a put option. Conversely, if you are bearish and believe the price will fall, you may want to buy a put option or sell a call option.

Volatility

Volatility can impact option prices, so it's important to consider how changes in volatility might affect your trades. Options with higher implied volatility generally have higher premiums. So, you may want to sell options when volatility is high and buy options when volatility is low.

Strike Price and Expiration

The strike price and expiration date of an option can significantly impact its value and potential profitability. When choosing an option, consider how likely it is that the price of the underlying cryptocurrency will reach the exercise price before the expiry date. Additionally, keep in mind that options with longer maturity dates typically have higher premiums. Therefore, you may need to balance potential gains with the cost of the option.

What Are the Levels of Options Trading?

Options trading levels are used by brokers to determine the types of strategies an investor can use in their account. These levels are based on an investor's experience, financial situation, and risk tolerance. Generally, there are four levels of options trading:

Level 1: You are allowed to write covered calls. It is a relatively low-risk strategy involving holding the underlying asset while selling call options.

Level 2: This level permits buying calls and puts. It involves speculating on the direction of the base asset's price movement.

Level 3: This level enables you to trade spreads, which are more advanced strategies involving multiple options positions.

Level 4: You are allowed to write uncovered (naked) calls and puts. That means that you do not have to hold the corresponding position in the option’s underlying cryptocurrency. It involves significant risk and is typically reserved for experienced investors with substantial capital.

Before engaging in options trading, ensure you have the appropriate level of authorization from your cryptocurrency exchange and that you understand the risks associated with each level.

Option Trading Tips

Here are some option trading strategies for beginners to consider:

1. Long Call

Long call means simply buying a call option. Choose a liquid base asset, i.e., a cryptocurrency with a high trading volume and open interest. Thus, you will ensure that you can easily enter and exit positions.

Be mindful of time decay. As the expiration date approaches, time decay accelerates, reducing the option's value. Buy options with enough time until expiration to capitalize on your anticipated price movement.

Employ technical indicators to identify entry and exit points and determine the strength of market trends.

2. Covered Call

A covered call means you have a position in the option’s underlying cryptocurrency. Select fundamentally strong crypto: writing covered calls on cryptos with strong fundamentals may help mitigate potential losses in case the crypto price declines.

Avoid high-volatility cryptos. Cryptos with high volatility may result in the underlying crypto price rising too much, causing you to miss out on potential gains

Opt for out-of-the-money options. Choose a strike price higher than the current crypto price to maintain the possibility of profiting from crypto appreciation while collecting premium income.

3. Long Put

Long put means you are purchasing a put option. Use long puts to protect your crypto holdings against potential price declines.

Time your entry: look for overbought market conditions, confirmed by technical indicators, to enter a long put position for better profit potential.

Manage risk: set stop-loss orders or have a predefined exit strategy to limit potential losses on your long put positions.

4. Short Put

Short put means that you are selling a put option. Focus on high-probability trades: write puts on cryptos you are willing to own at a lower price. Also, choose a strike price with a low probability of being in-the-money at expiration.

Monitor implied volatility. High implied volatility can lead to higher premiums, making it more attractive to write puts. However, be aware that it also implies larger potential price swings.

Maintain margin requirements. Ensure you have enough capital to cover the margin requirements for your short put positions to avoid forced liquidation.

5. Married Put

A married put is a strategy that involves purchasing a put option at the same time as buying an equivalent number of the underlying cryptocurrency.

Select a put option with an appropriate exercise price and maturity date to match your desired level of protection.

Evaluate cost vs. protection while selecting a put option. Weigh the cost of the put option against the level of protection it offers, considering both the premium paid and the potential profit from crypto appreciation.

Three Ways to Help You Succeed

First, Educate Yourself

So, basically, how do you make money with options? Thoroughly educating yourself about options trading is crucial to your success. Two key areas to focus on are:

Understand the Company

Research the cryptocurrency you plan to trade options on. Understand their business model, financials, and any relevant news or developments that may impact their price.

Look to the Future

Stay informed about market trends and economic indicators that may affect your trading decisions. This includes understanding how factors like interest rates, inflation, and global events can impact the price of assets like Bitcoin.

The Second Thing You Should Do is Understand Risk

To manage risk effectively in options trading, consider the following:

Understand Risk

Learn about the different types of risks involved in options trading, such as market risk, counterparty risk, and liquidity risk. Knowing these risks will help you make informed decisions and manage your trades effectively.

Positional Risk

Evaluate the potential risks associated with each trade, considering factors like the exercise price, expiration date, and implied volatility. This will help you choose the right options and strategies for your risk tolerance.

The Third Thing You Should Do is Develop a Plan

Creating a plan for your options trading activities is essential for long-term success. Some elements to include in your plan are:

Set Your Goals

Determine your overall investment goals and how options trading fits into your strategy. Are you looking to generate income, hedge your investments, or speculate on market movements? Having clear objectives will help guide your trading decisions.

Develop Your Strategies

Select the options trading strategies that align with your goals and risk tolerance. Experiment with different strategies and spreads to find the ones that work best for your needs.

Monitor Your Progress

Regularly review your options trading activities to ensure you are on track to achieve your goals. Assess your performance, learn from your mistakes, and make adjustments to your strategies as needed.

Frequently Asked Questions

Can You Trade Options for Free?

While some crypto exchanges may offer commission-free options trading, there are often costs involved, such as contract fees and margin requirements. It's essential to carefully review the fees and charges associated with any broker before opening an account to ensure you understand the full cost of trading options.

How Can I Start Trading Options?

To begin trading options, follow these steps:

1. Educate yourself about options trading, including the various strategies, risks, and potential rewards.
2. Open an account with an exchange that offers options trading. Be sure to review their fees, trading rules, and customer support before making a decision.
3. Develop a trading plan that outlines your goals, strategies, and risk management approach.
4. Fund your account and begin trading options according to your plan.

How Much Money Do You Need to Trade Options?

The amount of money required to trade options can vary, depending on factors such as the minimum account requirements of the exchange, the price of option contracts, and the strategies you choose. Therefore, the cost of option contracts can range from a few dollars to several hundred dollars, depending on the underlying cryptocurrency and market conditions.

Can You Make a Lot of Money Trading Options?

Definitely, it is possible to make a significant amount of money trading options. However, it's important to understand that success in options trading requires extensive knowledge, a well-thought-out strategy, discipline, and risk management. While some individuals have made considerable profits, others have experienced substantial losses. Becoming a successful options' trader typically involves continuous learning, keeping up with market trends, and adapting to changing market conditions. Remember that past performance is not a guarantee of future results, and it's essential to approach options trading with a realistic mindset and a commitment to ongoing education.

Can I Sell Options Immediately?

In most cases, you can sell options immediately after purchasing them, as long as there is sufficient liquidity in the market. However, it's essential to be aware of any trading restrictions imposed by the options exchange. For example, some exchanges may require a minimum holding period before you can sell options, while others may restrict certain types of trades, such as selling naked options.

*This communication is intended as strictly informational, and nothing herein constitutes an offer or a recommendation to buy, sell, or retain any specific product, security or investment, or to utilise or refrain from utilising any particular service. The use of the products and services referred to herein may be subject to certain limitations in specific jurisdictions. This communication does not constitute and shall under no circumstances be deemed to constitute investment advice. This communication is not intended to constitute a public offering of securities within the meaning of any applicable legislation.