This is part four of the Options Series. In this article, we will answer the question of Can Options Trading make you rich?
Options are a financial instrument that you can use for a number of different purposes: as protection against expected moves in an underlying instrument such as a stock; as a way to use leverage to control more of a stock than you want to buy outright; as a way to use your existing investments to earn additional cash; and many other uses. But, can you get rich trading options? The answer, unequivocally, is yes, you can get rich trading options.
The obvious next question then is, how can I get rich trading options?
The mistake that most people make is that they treat options just like stocks. Someone with some cash but not enough to buy many shares of stock, might use all of their cash to buy calls on their favorite growth stock with the expectation that the stock will absolutely skyrocket before the options expire. Since an option contract represents 100 shares of the underlying stock, they can profit from controlling a lot more shares of their favorite growth stock than they would if they were to purchase individual shares with the same amount of cash. When the chosen stock flies to the moon, they sell their options for a massive profit. Rinse and repeat and they would supposedly get rich.
Unfortunately, this is a large fallacy and absolutely the wrong strategy. Sure, some may get lucky a few times but that is exactly what it is, LUCK! The real question you should be asking yourself is, how do I remove luck from my options trading? Or put another way, how do you reduce risk in trading options?
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Check out this link from Investopedia if you want even more details on Options.