Many people question option trading, and believe this to be another way of gambling. While that is not always true, this article explains two ways you can trade options if you want a little bit of a rush.
1. Buying OTM options
If you are a new trader, or have no idea what out of the money options are, I have an article going into great detail about it and I will link below if you are interested, but to save you some time I can wrap up what is necessary to know in a couple of sentences.
To buy an OTM call option, you would buy the option at a strike price that is HIGHER than the current stock price.
To buy an OTM put option, you would buy the option at a strike price that is LOWER than the current stock price.
What this means is that with buying OTM calls, you are betting on the stock price to not only go up, but to go up past your chosen strike price AND go even further beyond that strike price to compensate for the price you paid for the option. Buying OTM puts is the same idea, but you are betting on the stock price to fall.
Why is this gambling?
The odds are against you!
Because the stock price has to go up significantly, these are typically low POP trades. In other words, you have a low probability of profit- always under 50%, with many traders risking it with only a 30% probability of profit. For reference, probability of profit is calculated by the market and shown to you before you place your trade, not just some metric I am ball-parking to make a point.
But high risk high reward right? Well yeah, but don’t be stupid. Think about this-
If you put on 10 trades, 30% probability of profit, logically what do you think your success rate will be?
While the market is most definitely not always efficient to a lot of our beliefs, who in their right mind would want these odds? Can this strategy work? Most definitely. Is this incredibly difficult to achieve? Oh yeah. But take a look below to see how it can work.
As you can see from the image above, in order for this strategy to work, you would have to manage your wins at a much higher profit, and would have to manage your losses to a much lower amount. So yeah, this is possible- but in my opinion not the most optimal, and so so stressful and difficult to achieve. It is also my opinion that this strategy is for the traders who love the rush, the ones who love to gamble. All the power to the ones who have the guts for this, but definitely not for me.
2. Trading weekly options
I have a whole article explaining the risks that come along with weekly options that I will link below if you are interested, but to explain why this is gambling> again, the odds are against you.
Quite simply, the less time you have in an option contract, the less time you have to manage your position if things go south, and the less time you have for the stock price to go where it needs to go. In other words, more risk, and worse odds.
Summary
While you can make a lot of money buying OTM options, and trading weekly options, it is my opinion that these two strategies are among the worst of the rookie mistakes. As explained, the odds are never in your favor, similar to a casino, which is why I feel buying OTM options and trading on weekly’s is in fact gambling. These are the kind of strategies which will bring you the highest of highs and also the lowest lows. This rush makes it very easy to get emotionally involved in your trading, and therefor can be a very difficult strategy to make work for consistent profits. If you are interested in learning how you can trade without gambling and want some weekly finance articles to stimulate your brain please subscribe below 🙂