CNBC’s Yun Li reports, “A record of 39 million options contracts have traded daily on average this year, rising 35% from 2020, according to Options Clearing Corp.” After nearly twenty years of opening a brokerage account and managing a stock portfolio, I completed an options course offered by TD Ameritrade and contributed to this year’s record options trading volume.
Most of my options trades are for securities that I do not mind owning. I sell out of the money (OTM) put options rather than setting buy limit orders for stocks that I want to buy, and I sell OTM call options instead of setting sell limit orders for stocks that I own. Through these transactions, I earn a premium while I wait for my desired entry or exit prices.
Options provide investors and traders additional tools and options strategies. Without options, a swing trader is limited to buying or short selling a stock and riding the stock’s change in value. In a kind of swing trading using options, I have sold cash-secured puts, covered calls, Jade Lizards, and Iron Condors in order to gain premiums while an underlying security trades within a range. I have been able to keep premiums when options expire worthless, and I have had stocks assigned to me as well as called away. I continue to sell options on the underlying that has been assigned or called away, performing something known as the Wheel Strategy.
I have sold options and options spreads throughout my first year. I have been selling options to generate income. Future development in my options trading involves speculation and buying spreads. As Yun Li’s article reports, buying basic call and put options has a much lower probability of profit compared with options spreads. So, I intend to buy spreads or, in other words, buy an option and sell a further OTM option to offset the cost of the bought option. Buying an options spread exposes me to losing the net premium I pay for the spread. The speculative nature is derived from the premium being paid upfront and the hope that the price of the option increases to cover the cost of the spread before the options’ expiration date.
It is important to recognize the limits of one’s risk tolerance. My risk tolerance steers me away from selling naked calls and certain ratio spreads. These kinds of options trades require the highest levels of trading privileges granted by brokerages. I do not plan on requesting the highest options trading privileges at this time. I appreciate the protection that is provided by being unable to sell naked calls.
In closing, I should note that options are not suitable for all investors. Understanding option pricing behavior is a minimal requirement for trading options. Being familiar with the following is a must: how much the price of an option changes along with changes in the underlying security’s price, the change in the amount of change in an options price as the underlying’s price changes, the effect of time and changes to volatility specific to the security and the market as a whole. People have lost their entire accounts by not understanding options and neglecting basic risk management.
Can Anyone Guess When I Discovered Options Trading
by /u/hatemydarnjob on Reddit’s WallStreetBets