If you want to make money with options, start with these safer, easier options for beginners.
We’ll explain the trading strategies more in Part 2 of this Options for Beginners series, but don’t skip these questions before you move on to the sexy, money making posts.
Ready to upgrade your investing to a level that very few have fully tapped into yet? Let’s go!
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Who can buy and sell options?
Everyone can buy and sell stock options, but not everyone should.
Some people should just buy units of SPY, VTI, QQQ, or other general market ETFs and hold for 10, 20 or 30 years. These people don’t have the patience for option trading. There is nothing wrong with that. In fact, knowing that in advance is a major win.
Wait.
Someone who is willing to buy and hold stocks for 30 years doesn’t have enough patience?
Look at it this way:
When you buy and hold for 30 years, chances are you’re looking at your account a handful of times throughout the year. You don’t have to think about it. That’s not really patience as much as it is forgetting about your account for a while. It’s a luxurious way to invest, don’t get me wrong.
On the flip side, when trading options, you’re likely looking at your account everyday. It takes a tremendous amount of patience to not react out of fear when you see your positions in the red.
Because with options, when done right, time is on your side, even when your positions are technically sitting at a loss.
So, can you see a big negative number, but have the patience to see the trade through?
Now, sometimes you really do need to cut your losses and move on, but making that decision requires clear, patient thinking, not knee-jerk, emotional reactions.
If you can stay mostly cool about your trades, options trading might be for you.
Are stock options good for beginners?
Are options safe for beginners? Should you start with options or stocks?
Options can be relatively safer than stocks. There are strategies that actually protect you from price drops and put cash in your pocket right away. We’ll introduce a couple of those strategies later on in this post.
If you sell a “put option,” the worst that can happen is you eventually have to buy stock. Then you own an asset AND you bought it at a discount (again, we lay out the details of this more later).
If you trade stocks outright (buy with the intent to sell quickly), you have to be right about which way the stock is going. There’s no buffer if you’re wrong and you’re stuck with assets you never intended to hold.
Trading stocks can be lucrative, it’s just less forgiving than trading options. With the right strategies, options can be better for beginners.
How much money do you need to start trading stock options?
I (Erwin) started with $10,000. We know investors who started with $25,000 or $50,000. One of the graduates from our beginner course actually has a $5,000 that he’s trading with.
So can you trade options with $100?
No.
First of all, I don’t know any brokers that would let you trade options with only $100 in the account.
Second, options contracts are for 100 shares at a time. So if you’re selling a put option on a $50 stock, you’re promising to buy 100 shares at $50 ($5000 total needed).
Now, that doesn’t mean you have to or that you will buy those shares, but it means you need to be prepared to buy 100 shares at $50, should the right contract conditions be met.
So you can see how a smaller bank roll will limit your trading capacity. It still works, you just have to be mindful of your commitments.
How much does it cost to start trading stock options?
We’ll go into more detail about brokerages and trading costs in a future post, but here’s a quick overview of what to watch out for.
- Every brokerage charges you for each transaction. Transaction fees range from $0.75 to $9.99.
- Some brokerages charge for live data, which is usually a monthly fee. This isn’t always a straightforward, “pay $XX / month, get all the data.” Sometimes you get discounts based on the number of transactions you made in a month. Many times you have to pay for data from specific markets, (NYSE, NASDAQ, TSX, etc.) And then there can also be differences between stock price data and option price data.
- This isn’t a cost as much as it is a consideration. Some brokerages want to know you’re not trading your life savings. So they’ll ask a lot of questions about why you want to trade options, how much you make in a year, total assets vs. liabilities, and how much cash you have saved.
Again, we’ll unpack more of those details in a future post, but for now, know that there is a cost associated with trading stocks and options.
What type of option trading is best for beginners?
This is going to be a tease… sorry.
There are 4 strategies that make options ideal for beginners, but the two that we’ll introduce here are:
- Puts options and how to sell them for cash flow
- Covered Calls and how it’s like renting out your stock
Selling put options options for beginners
When you sell a put option, you’re promising someone that you will buy their stock from them at XX price by XXXX date.
Let’s say XYZ stock is at $97, but you want it at $93 per share.
I may want the assurance that I can sell my shares of XYZ at $93 / share for the next few months. Maybe I’m worried that the price will drop.
So I accept your promise and we enter into a contract. (It’s never that formal, but this is the underlying principle).
You’re taking on some risk. XYZ could drop from $97 to $90 in the next few months. We don’t know. For that taking that risk, I pay you a small premium per share, maybe $0.95.
Because every options contract is for 100 shares, you collected $95 up front.
As long as XYZ doesn’t drop to $93 per share for the duration of our contract, you keep the full $95.
Then you can go sell another put and keep collecting premiums.
See how this can become very attractive as it scales up?
Selling covered call options for beginners
Here’s a strategy you can use in registered accounts (TFSA, RRSP).
Let’s say you own at least 100 shares of XYZ at an average price of $97 / share. Maybe you’d be willing to let go of those shares for $107 / share.
I might be willing to pick XYZ up for $107. So you promise to sell 100 shares of XYZ to me for $107 / share for the next couple months.
Now, for all we know, XYZ could climb to $127 by the end of those couple months. I risk leaving money on the table by making you this promise. So for that risk you pay me a small premium up front, say $0.50 per share.
Because every options contract is for 100 shares, $0.50 premium per share = $50 in your account right away.
If XYZ never reaches $107, you keep your shares and the $50.
Again, see how this can scale and create cash flow, especially in a TFSA or RRSP?!
So what does this mean for me?
This means you could potentially create a new source of cash flow using strategies that give you a buffer from price drops and let you profit from stocks you already own.
It also means, if you don’t know what you’re doing, you could completely blow your finances up.
But with the right education and support, this can be a profitable side hustle.
In part 2 of Options for Beginners, we go into more detail about exactly what options are and how those 2 strategies work.
If you want a notification when part 2 drops, subscribe to our newsletter for weekly stock option education emailed directly to you.
And we’ll talk to you later!
Happy trading,
Erwin and Cherry Szeto
P.S. If you’re interested in finding a new side hustle, we’ve put together a new case study that examines the four most popular side hustles for passive income in Canada. You can download this case study for FREE right now if you sign up for our email newsletter.
