How Options Can Help Traders Maximize Profits

Research shows that options trading activity continues to rise year-on-year. According to CNBC, 39 million options contracts were traded daily in 2021. It was a 35 percent increase from 2020. While options trading has become more popular recently, it’s not something new. People have been using options for a long time to maximize their potential profits and limit their losses. For instance, you might have heard the story about how Mark Cuban, the Shark Tank star and Dallas Mavericks owner, saved his fortune despite Yahoo’s stock plummeting during the height of the Dot-com crash.

The good news is you can also use options to maximize profits and minimize losses.

Traders analyzing market movements

Challenges with Options Trading

You’ll want to understand some of the limitations of options trading before you can implement suitable profit-taking strategies. These limitations include the following:

  1. While stocks can be held indefinitely, options have an expiry date. As a result, your trading window is limited. You’re going to miss out on the ability to exercise your options contract if you don’t utilize it appropriately.
  2. Some strategies, such as averaging down, seem feasible when trading stocks. After all, they’re long-term strategies. However, these strategies aren’t suitable for options trading because of the limited duration.
  3. It’s also important to remember that margin requirements can significantly impact trading capital requirements.
  4. Various factors affect options price. As a result, it can be difficult to focus on a profitable price move. Let’s assume you’re trading options for a specific stock. The stock’s price might increase, opening the door for sizable returns on your options contract. However, factors such as volatility, time decay, and dividend payment can affect those gains in the short run.

Traders observing trading chart patterns

Potential Strategies You Can Use to Maximize Profits with Options

You’ll want to consider using these strategies if you’re a beginner to options trading to maximize your profits with options:

Trailing Stop

Trailing stop is a popular strategy that can help options traders maximize profits. Whether a day or swing trader, it’s an excellent strategy to consider. It requires setting a predetermined percentage level for a specific target. For instance, let’s assume you purchase ten option contracts for $80 each, meaning you paid a total of $800. In addition, you can set $70 as your stop-loss order and keep $100 as the profit target.

Let’s assume you reach your $100 target. It’ll cause $95 to become your trailing target. Similarly, let’s assume the target continues to increase, reaching $120. Your trailing stop will become $114. Suddenly, the market changes, and trends reverse. The price starts falling. A trailing stop will allow you to sell the options for $114.

Partial profit Booking at Targets

Many savvy options traders will often book partial profits once they’ve achieved a specific target. For instance, let’s assume they opened a trading position, and their target was to hit $100. They’ll square off 40 or 50 percent of their position if the target is achieved. Doing so has several benefits for options trading, including the following:

  • Partial profit booking prevents capital losses from sudden price reversals, often occurring in options trading. As a result, your trading capital is protected. For instance, let’s assume a trader sells five contracts when they hit their $100 target. It allows them to retain $500 of their capital.
  • The trader can continue to benefit from their remaining open position, allowing them to reap more benefits in the future. Let’s assume your position exceeds your target, reaching $120. Selling your remaining contracts will allow you to net $600 instead of $500. As a result, your total returns would increase to $1,100. Many traders will also sell half of their remaining position, waiting for the target to increase. Doing so can help them generate higher returns.

Averaging Up

It’s well-known that averaging down is one of the worst strategies you can use in options trading because it’s a longer-term strategy. And most options contracts end within a few months, meaning your options will expire before you can exercise them, rendering your averaging down strategy useless.

Therefore, you’re better off closing the current option position at a loss. Instead, consider starting fresh with a new position. Try to ensure your new position has a longer expiry duration.

Let’s assume your target was $100, which you achieved. Consider purchasing another five contracts for that stock in addition to the ten you purchased earlier at $80. You’ll now have fifteen option contracts, meaning the average price will rise to $86.67. Consider averaging up and buying more options as you hit higher targets. For instance, buy another three contracts if your target of $120 is also reached. It’ll increase the average price to $92.22 for 18 contracts. You can then sell all your contracts when the target reaches $150. It’ll give you a profit of $1040. Alternatively, you can continue to buy more contracts or utilize a trailing loss.

A trading graph on an iPad

Get Started with Trading Alphas

Understanding daily trading patterns can be difficult for a new trader. You’ll likely need some guidance and assistance to help you navigate the market. That’s where Trading Alphas enters the mix. The organization has helped its diverse options trading community of over 1000 members make over $25 million in profits. You can sign up for an options trading subscription on their website. Alternatively, you can also join their options trading Discord server.

Consider checking out their website for more information. You can also contact them to learn more.

News Reporter