How To Get Rich From Trading Options: 7 Ways

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Options are a type of derivative, meaning they “derive” their value from the securities they’re linked to. Options are also leveraged, meaning a smaller amount invested in them generates larger gains — or losses — than simply buying the underlying security.

For example, if you think Tesla stock is about to make a huge move up, rather than laying out $20,000 or more per share to buy 100 shares of the stock, you can spend perhaps $200 per option to gain the same amount of exposure. These trades have very different risk profiles, but the capital needed reflects the leverage involved.

Can Options Trading Make You Wealthy?

Yes, options trading can make you a lot of money — if you understand how it works, invest smart and get a little lucky. You can also lose all of your money trading options, so do your research before getting started.

There are two primary types of options: calls and puts. In its most basic form, a call option gives you the right to buy 100 shares of an underlying stock at a given price by a given date, while buying a put option works oppositely: You can sell 100 shares of the underlying stock at a given price by a given date.

Beyond these basic definitions, however, you can buy and sell options in various ways. Over time, you may look to some more advanced trading strategies in your quest to get rich.

Here’s a quick overview of how to make money with options, along with some basic but essential information about options in general.

1. Buy Puts

Buying a put is betting on a stock’s price falling. Rather than short-selling a stock, you can simply buy a put and profit if its share price drops.

For example, say you’re bearish on Tesla stock and think it’ll drop from around $200 per share to $150 shortly. You can buy a put option on Tesla with a strike price of, say, 200 for perhaps $20 per option. If the stock does fall to $150, the option’s intrinsic value shoots up to $50, in addition to whatever time value remains.

Buying puts is the lowest-risk strategy because your loss is limited to the premium you pay, unlike some more aggressive strategies. While it’s true that you can lose your entire investment if the stock goes nowhere or trades higher before the option expires, you won’t have to dig into your pocket and come up with more money if you’re on the wrong side of the bet.

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2. Sell Covered Puts

Selling a covered put is a way to generate income from an existing short position. If the stock does nothing or goes down slightly, you’ll get a boost in profit from the premium you receive for selling the put. The risk is that if the stock instead rises sharply, it will result in a loss for you. However, the loss will still be less than if you simply held the short position outright.

3. Sell Naked Puts

Selling a naked put is one of the most aggressive bets in the options world. When you sell a naked put, you are giving the purchaser of your option the right to force you to buy the stock at the strike price at any time. If the stock falls to zero, for example, you’ll still be forced to buy the stock at the strike price. But if the stock rises, you’ll keep the premium you received without any further repercussions.

4. Buy Calls

Buying a call is the simplest way to profit from a speculative trade. When you buy a call, you are betting that the price of a stock will move higher, typically over a short period. Buying a call gives you the right — but not the obligation — to purchase shares of a stock at a certain designated price within a specific time frame. Generally, call buyers believe that a stock price rise is imminent and want to use the leverage of options to magnify their gains. This is a key aspect of how to make money with options.

For example, imagine Tesla trades for $185 and you buy a call with a strike price of 200 for $20. If the stock rises to $400 per share, the intrinsic value of your option rises to $200, plus any remaining time value. While stock investors will have made a 116% profit, you will have earned at least 10x your money.

Buying calls can also be a way to conserve capital. In the example above, if you wanted to buy 100 shares of Tesla, you’d have to lay out $18,500 in cash. But buying the call option would only cost you $2,000. Certainly, owning the option involves a much higher risk of losing all of your money, as if the stock doesn’t move, the option will eventually expire worthless. But you’d also be magnifying your gains while keeping that additional $16,500 in your pocket at the same time.

5. Sell Covered Calls

Selling covered calls is a more conservative option strategy that carries lower risk and lower reward.

When you sell a covered call, you’re selling a call against a stock you already own. This means you give another investor the right to buy, or “call,” your shares of stock away at a specified price before a specified date. By selling away this right, you receive the option premium as income.

The ideal scenario for an investor selling a call is that the stock’s price doesn’t rise beyond the option’s strike price. In that case, you both pocket the premium you received as income and keep your stock. In other words, if your stock falls, does nothing or rises to a price below the stock price, you profit from the sale. But if the stock rises, you may lose out on some potential upside as your stock gets called away from you by the purchaser of the option. For this reason, if you want to keep the stock, you should only sell a call at a price that you’d be happy to receive for the stock.

Here’s an example. Imagine you own 100 shares of Coca-Cola currently trading at $50 per share. While you don’t want to sell the stock, you’d be fine accepting $60 per share for your position, as that would mark a 20% gain over current levels. You could sell a call against your shares at $60 for a premium of, say, $2 per share.

If the stock trades beneath $60 for the entire period until expiration, you will keep both the $200 in premium and your 100 shares of Coca-Cola. But if the stock trades higher, you’ll net both the $200 in premium income and the additional $1,000 in capital gains as the stock moves from $50 to $60. In this sense, you can’t really “lose” selling a covered call. The worst-case scenario is that you give up any future moves on the stock. If Coca-Cola traded at $70, for example, you’d still only receive $60 per share.

6. Sell Naked Calls

Selling a naked call is the riskiest strategy possible in the options world, as it subjects you to a theoretically infinite loss. You’ll profit by keeping the premium you receive from the sale if the stock remains the same price or falls.

However, if it rises, you’ll be forced to buy the stock in the open market at the current price to provide it to the buyer of your call option. As a stock can theoretically rise to any price, you may be forced to pay a huge amount to buy that stock and fulfill your obligation.

7. More Exotic Strategies

While you can certainly “get rich” by trading options in these most direct ways, there are also more complicated strategies employed by professional options traders that may enhance your return potential and/or reduce your risk. These methods go by such exotic names as “spreads,” “straddles,” “strangles” and even “The Iron Condor.”

Just to explore what a more complicated options strategy may look like, take the case of a long straddle. This involves buying both a call option and a put option with the same strike price and expiration date. In this scenario, you can only profit if the underlying stock makes a big move. But since you own both a put and a call, you’ll profit from a move in either direction. The big risk with this strategy is that the stock must make a big move in either direction or else you’ll lose the cost of both premiums.

Before you begin trading these more advanced options strategies, be sure to consult with a financial advisor regarding their appropriateness for your portfolio and risk profile.

How Do Options Get Their Value?

In one sense, options are essentially “made-up” securities. The only reason they have any value at all is that they confer certain rights associated with a different security. 

The options price you see listed in the active market is a combination of an option’s “intrinsic” and “time” value.

Intrinsic Value

The intrinsic value of an option is the amount that it’s “in the money” to its strike price. For example, if you own a Microsoft call with a strike price of 200 but the actual market price of Microsoft shares is $250, you are “in the money” by $50. This $50 is the intrinsic value of that call option.

Time Value

But since options also expire at a set date in the future, they also have a time value. The longer an option is dated, the greater the time value it has, as it gives the stock a longer period to get “in the money.”

Imagine that you and your friend both have Microsoft call options with strike prices of 200. Your option expires in April, but your friend’s doesn’t expire until December. Which option would be more valuable? The one that affords Microsoft stock a longer time to climb above $200 per share. Thus, the time value of your friend’s option would be significantly larger than yours.

What Are All the Numbers Associated With an Option?

If you’re looking to buy or sell an option, you might notice that there is both a month and a series of numbers associated with each option. For example, you might see a stock call option listing that looks like this:

• MSFT JUL 200 83.08

This means that you can buy one call option on Microsoft stock that expires on the third Friday of July for $83.08.

As each option gives you the right to control 100 shares, that $83.08 price will cost you $8,308. The “200” figure is the strike price, which is the price that you will have to pay if you want to exercise your call option. In addition to the $8,308, if you want to exercise that call option and buy 100 shares of Microsoft, you’ll have to fork over an additional $20,000, or 200 x 100 shares.

Final Take

Employing these seven options trading strategies — and understanding the market — can make you rich. Just remember that no investment is without risk. If you’re interested in trading options, you should consult with a financial advisor about your risk tolerance and financial goals first.

John Csiszar contributed to the reporting for this article.

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