how to trade options for beginners in this video we're going to learn the absolute best strategy to
consistently earn profits by trading options while also minimizing your drawdowns and reducing your
risk a lot of people are interested in trading options because options provide leverage and the
opportunity for you to earn outsized gains and beat the market consistently. Options are also
very Capital efficient so if you're trading stock even if you're using a margin account then your
buying power will be reduced by about 50 percent of the notional value of that stock when you're
trading options and you're using margin then your buying power will be reduced anywhere from around
five percent if you're using portfolio margin to around 15 to 20 percent if you're using regulation
t as a result the greater leverage and capital efficiency provides you with an opportunity to
both earn more money but on the downside you are taking more risk and we are going to get
into how to reduce that risk later in this video the first really important point if you want to
trade options profitably and if you want to learn the most successful and profitable options trading
strategy is that primarily you want to Target selling options the reason for this is that when
you buy options you're actually paying for the time value or the Theta Decay and as a result the
probability of being profitable for a trade when you're buying options is below 50 percent this is
because when you buy options the underlying stock actually has to appreciate in value more in order
to compensate you for the time value that you actually paid however there are specific times
when it's advantageous for you to buy options and as I discuss in the options trading education
course at beststockstrategy.com/memberships there are specific times when it is extremely important
to buy options in order to decrease portfolio volatility and to reduce drawdowns but in general
we're going to sell out of the money put options in order to collect premium and turn ourselves
into insurance companies and turn ourselves into casinos but at the same time there are going to
be specific times when we're going to be buying options in order to reduce portfolio volatility
and to reduce risk in my opinion this is the most profitable options trading strategy and this is
the best options trading strategy for beginners remember the goal when you sell options is that
you want to make sure that you reduce portfolio volatility and also minimize your drawdowns when
you sell options your maximum amount of profit is going to be the premium that you collected for
example if Amazon is trading at 95 and you sell a put option with a strike price of 85 dollars and
an expiration of three weeks out in time and you collect a $1.25 then that means that you
agree to buy Amazon at a price of eighty five dollars and if the underlying stock decreases
below 85 dollars then you can roll and manage the position which is something that I discuss in the
options trading education course however if you choose not to roll that position then you will
get assigned a hundred shares for every contract that you sell at a strike price of 85 dollars as
a result you'll be able to own Amazon at 85 even though when you actually sold the option Amazon
was trading at ninety five dollars and you'll be able to keep the premium that you collected when
you actually sold that option so what specific underlyings and indices should you have on your
watch list in my opinion you should have stocks and indices such as VOO, VT, SCHD, qqqs amzn
msft JPM Waste Management which is WM so by having these indices and Market leading stocks
like JP Morgan or waste management or Microsoft or Amazon you should be able to reduce your
portfolio volatility while simultaneously if the market corrects then on a long-term basis if you
take ownership by the stock you should be able to participate in the upside if you're able to
pick up those shares at a discount by selling out of the money put options and collecting extrinsic
premium by agreeing to buy the underlying stock at a discount to where it's currently trading
at remember it is vitally important to only sell options on stocks that you want to own remember
options are leveraged products therefore while you can make a lot of money by trading options
you can also lose a lot of money money if you trade too aggressively and if the market pulls
back 10 20 or even 30 percent and you sold a lot of out of the money put options without having
them be covered or without hedging your positions then you're going to experience something called
correlation risk where a lot of your positions are going to be challenged and that's going to
use up a lot of your available buying power and as a result you might be forced into a margin
call at the most inopportune time this is why it's extremely important to buy options and make sure
that you minimize your risk so that way the once or twice a year when the market acts irrationally
either to the upside or to the downside you're not caught and forced to close out your positions at
the most inopportune time additionally by selling options only on stocks or indices that you want
to own this will allow you to participate in the upside of a stock or an index and therefore
profit from the long-term capital appreciation of that specific underlying over the long term
you definitely don't want to trade options on speculative companies because as I said earlier
you don't want to take too much risk when selling options because options are leveraged products and
the losses hurt significantly more than the gains feel good so by trading options make
sure that your primary goal should always be to reduce portfolio volatility and to reduce
and minimize drawdowns there are primarily two ways that you can structure a trade you
can either trade naked or you can trade spreads spreads are defined risk trades and spreads are
very good primarily for two reasons the first is that they are extremely Capital efficient and the
second is that because they are defined risk you do not have that downside risk or that tail risk
when minimizing risk you can trade vertical credit spreads which again are defined risk trades and
remember you only want to trade naked on stocks or indices that you actually want to take ownership
of in order to participate in the upside of the underlying stock or index because remember when
you trade options or specifically when you sell options then your maximum profit is only going
to be the premium that you collected but when you take ownership of stock you actually have
uncapped to an unlimited profit potential to the upside however when you take ownership of stock
you also have risk to the downside so you want to make sure that you only take ownership of
the best underlying stocks and indices one way of reducing risk when trading options besides trading
vertical credit spreads is to roll and manage your positions to a more advantageous strike by
extending the duration I discuss this in detail along with many other Advanced options trading
strategies in my options trading education course you can visit beststockstrategy.com
memberships to take the course or to follow my trades you can follow my option trade alerts it's
only nineteen dollars for seven days a few other really important points in how to trade options
for beginners it is vitally important point to keep things very simple you don't want to over
complicate things try to keep things as simple as possible have a small and tight watch list
ignore everything else do not trade too often make sure that your positions are never at risk
if the market falls 30 percent in one month like it did in March 2020 or if we experience a grind
down market like we did in 2022 the second very important point is make sure that you don't get
greedy don't trade too large because remember even if you win 95 98 99 of your trades if you run into
a situation where there's significant correlation risk and if you're unable to hedge your account to
control for large drawdowns in the market then you even if you win 95 or 98 of your trades then you
could actually from a cumulative perspective lose money if you're forced to close out your positions
at the most inopportune time when placed in a margin call if the market has a really bad
month and finally your goal should always be to reduce portfolio volatility and minimize risk as
a natural consequence to reducing and minimizing portfolio volatility and reducing drawdowns then
options Traders will as a natural consequence to reducing portfolio volatility earn around two to
four percent every single month so your primary goal should be to make sure that you hedge your
existing positions either by buying options or by trading spreads or if you want to sell
Naked options then make sure that you don't trade too large and that you want to own that specific
underlying or that specific index at the strike price in order to participate in the upside of
that stock or index and additionally you can roll the position which is something that I discussed
in the options trading education course so this was a very high level guide to trading options
you want to make sure that you keep things as simple as possible I briefly touched upon how
it's difficult to consistently buy call options and to be profitable by engaging in that strategy
while it is possible to buy call options and there are specific times when it's worthwhile
and advantageous to purchase call options or to purchase leaps there are many better strategies
on an overall day-to-day basis that will allow you to engage in more high probability trading but at
the same time control your downside risk there are some more advanced strategies for example if
you're using portfolio margin you can actually go long shares and because portfolio margin provides
you with free leverage then the shares that you actually own can be used as collateral to
actually sell options off of that again all of this stuff is discussed in my options training
education course this was a very high level options trading guide for beginners to make
sure that people feel comfortable with the overall strategy regarding targeting Market
leading stocks like Amazon or Microsoft or JP Morgan and also indices like spy SPX, which is
the 1256 contract so it also has tax advantage benefits, or you can trade something like VOO
where if you actually take ownership of it then it has very low expense ratios but thinking in
these terms where you want to make sure that you minimize your drawdowns or some of the best ways
that you can consistently be a profitable Trader now in the course I specifically go over when is
the best time to buy options so that you reduce and minimize your portfolio volatility this
is David Jaffe with beststockstrategy.com visit beststockstrategy.com enter in your email address
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