Why Options Trading Is Not As Scary As You Think

If investing is a scary word for you, then trading is going to be a scarier term to behold. If you were to ask me one year ago to do trading, I would run far away. However, I later realise that my fears came from my ignorance, as well as from growing up listening to horror stories of people going bankrupt or commiting suicide after they lost everything in the stock market.

So, in this article, I am going to simplify options trading for you. Thereafter, you can decide if it is really worth the time and efforts to find out more or get started in options trading.

Let’s just say you have always been interested to own a condominium unit near Bishan MRT (Singapore). You feel comfortable to pay market price of $1.5M for a unit. Of course, if the price can be lowered, it is better for you.

Well, now you have a chance to do so. You can enter a 30-day contract whereby you will be paid a premium of say $30,000 (2%) upfront. And depending on the market price of the condo unit after 30 days, there are 2 scenarios that can happen.

Scenario 1: The market price of the condo rises above $1.5M.

For this scenario, you do nothing and keep the $30,000 premium.

Scenario 2: The market price of the condo drops below $1.5M

For this scenario, you will need to honour the contract and buy the condo at $1.5M, which is a price that you are comfortable paying in the first place.

On top of that, you can still use the $30k premium that you have collected upfront when the contract is established, to offset your purchase, which gives you a final discounted price of $1.47M.

The above example is an analogy of a PUT option contract.

So what is the risk of this contract?

The risk is no matter how much the market price dropped after 30 days, say to $1M, you will still need to buy it at $1.5M.

We manage this risk by choosing stocks:

1. Stocks with great fundamentals

Think of the big established companies like Google, Apple or Microsoft. They may give you a lower upfront premium but they also lower the risk significantly as their prices are unlikely to fluctuate so much.

2. Stocks that you always wanted to buy and don’t mind holding for a long time

For example, if you are a fan of Apple products and would love to be a shareholder of the company, you can always buy and hold the shares of the company and wait for it to rise, while collecting dividends along the way.

I hope the above simple analogy helps you to understand how options work. It is a powerful tool and when use in the right manner, can generates great returns for your investment. But, it is only tool, whether you win or lose, depends pretty much on the company/ stock that you are buying. So, do your research well before venturing into options trading. All the best!

Related Articles:
How PUT Option Works
How Call Option Works
How Does The WHEEL Strategy Works?

*** FREE RESOURCES ***
Keen to learn about options trading but do not wish to pay for expensive courses, this newbie guide will help gain the knowledge and fundamentals to understand options better. And it’s totally free!
The Newbie’s Guide To Options Trading

Looking for ideas on what stocks to invest in or which stocks to trade? You can take reference from what I have been buying or selling. I try to update them as soon as I can in this section, as well as share my thoughts on executing these trades:
MY TRADES

If the bear market in 2022 is making feel depressed as your stocks come tumbling down, read this article to find out how you can use options trading to help you claw back some of your losses as you await market recovery:
How I Do Earn Even When The Stock Market Is Bearish?

Also, check out my trading strategies in different market conditions, whether it is bullish, bearish or volatile:
How Not To Lose Money In Trading? | My Trading Strategies For Bullish, Bearish And Volatile Market

I watched tons of videos on YouTube since 2020 and if you are wondering if there are any useful channels that you can subscribe to for learning market trends, TA, FA, check out this compilation here:
My Secret Weapons For Options Trading: I Watch These YouTube Financial Channels Every Day

I concluded my first year of options trading with more than USD160k of gain, see how I do it and the capital I use for every month to give you a sensing of the percentage yield I get out of my gains:
1st Year Options Trading Recap: The Journey Towards SGD$217,509 Profits In 2021

This blog is as authentic and as transparent as I can share, I do not just show the wins and hide the loss. I have made some very bad decisions in the first 8 years of investing and paid a huge price for them. Here is the loss I have accumulated during these years. I hope you learn some lessons from my mistakes.
I Cut $135,715 Worth Of Losses In The Last 1.5 Months

Want to learn more about Technical Analysis (TA) but find it difficult to grasp the concepts? This article brings you TA at a glance, and helps you understand key terminologies, indicators, and techniques used in TA to equip you with the knowledge that can empower you in your investing/ trading journey.
The Newbie Guide To Technical Analysis (TA)

Excited to start your trading journey or perhaps try out with a paper trading account to build your confidence in trading? Check out this step-by-step to help you get started:
How To Buy Options on Interactive Brokers (Step-By-Step)

Follow me on your favorite social media platforms, FacebookLinkedIn, or Twitter, to get notified of my latest blog posts. Or join our investing/ trading community at Telegram to exchange ideas or ask questions relating to investing/ trading.

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