What are you looking for when it comes to option trading? Many traders approach it like gambling, looking for the Big Score. Others approach it a little more conservatively, looking to just make a good living trading options. The best approach may be a little of each.
Generating recurring consistent income on a monthly basis trading options can be achieved. Does that mean you’ll be profitable each and every month, probably not, but most months, yes it’s possible.
Just like any business that involves buying and selling of some product or service, options trading involves buying and selling of Calls and Puts. Calls are what you buy when you believe the underlying stock of the option is going up and Puts are what you buy when you believe the stock is going down. Call and Put options give you the right to purchase or sell the underlying stock at the strike price of that option. Stock and Index Options normally expire on the third Friday of every month.
What if the underlying stock doesn’t move in your desired direction or does not move at all, then the Options slowly day by day decrease in value as you get closer to expiration. Why is this, because as you get closer to expiration it becomes less and less certain that the stock is going to hit or exceed the strike price that you purchased your option for. This is only a brief description of options, depending on your experience, if you already have a basic understanding, then this is information you already know, but if you do not, there are plenty of good books on the basics of Options.
You need to read this informative article cautiously, the situation and the solutions have a lot of versions. The important thing to remember though, when you trade for monthly income, is that the price of a stock and underlying option can not be in 2 places at one time, so you are making a profit on one side of the trade or the other. That’s an important distinction to make because you’re going to make money whether the stock goes up or down.
There are several strategies that can be used to trade options on the exchanges to take advantage of these principles for monthly income. One of the keys to using these strategies is adjustments, it’s very important to make adjustments to the option positions that you take. Because one of the rules of the market is that prices will fluctuate. You do not care whether they go up or down for our purposes.
There are actually 2 rules to the options markets, prices fluctuate and options expire. There is a third rule though, that’s do not lose money. I say that third rule half jokingly but with an element of truth, in order to not lose money it’s important to make adjustments to your original positions. This is where a lot of option traders make a mistake, they put on positions not making adjustments and leaving their option positions alone to expiration, until they’re losing money and it’s too late to make an adjustment. Monitoring your positions and making adjustments is where the majority of profits are made.
