What Is Options Trading And How Do You Start Making Profits Through It?

Options trading is a financial derivative strategy that involves the buying and selling of options contracts on an underlying asset, such as stocks, commodities or indices. An option is a contract that gives the buyer the right, but not the obligation, to buy or sell the underlying asset at a predetermined price within a specified time period. There are two types of options: call options, which give the holder the right to buy the asset, and put options, which give the holder the right to sell the asset. 

Options are attractive to investors for multiple reasons. Options provide investors with leverage, allowing them to control a larger position of the underlying asset with a relatively small amount of capital. This can amplify potential gains if the market moves in their favor. Options can also be used as a hedging tool to protect against downside risk. By purchasing put options, investors can limit potential losses in case the value of the underlying asset decreases.

Another advantage of options trading is the flexibility it offers. Options can be used in various strategies to generate income, enhance returns or reduce risk. One example is when a covered call involves selling call options on shares of a stock already owned, providing the investor with premium income while potentially limiting the upside. On the other hand, buying call options can provide investors with the opportunity to profit from a rise in the price of the underlying asset without having to own it.

One of the biggest benefits of options is that it diversifies an investment portfolio. By incorporating options alongside traditional holdings, investors can further customize their risk exposure and potentially enhance returns. Options can be used to profit in various market conditions, including bullish, bearish or even sideways markets. This flexibility and adaptability make options trading an attractive tool for active investors looking for additional opportunities and strategies to enhance their investment outcomes.

Robinhood Markets Inc. HOOD is a popular commission-free brokerage platform that offers options trading. On Robinhood, options contracts are traded on various stocks and ETFs. Robinhood provides users with the ability to trade options contracts through their user-friendly mobile app and website. Users can place options trades and monitor their positions on the go. The platform offers features like options chain metrics, which allow users to browse options contracts by strike price, expiration date and more. Users can customize and view various metrics on their options chain to make informed trading decisions.

Robinhood has always prided itself on educating investors, and it offers educational resources and support for options trading, including a knowledge center with articles that cover the basics of options trading and basic options strategies. 

As options trading recently celebrated its 50th year anniversary in 2023, it is evident that the popularity and significance of this market are not waning any time soon. Despite a challenging bear market in stocks, the total volume of U.S. options in 2022 surged by 4.6% compared to the previous year, reaching a total of 10.32 billion contracts. This included a diverse range of options, including 9.6 billion equity-linked options, 721.2 million non-equity options, and 55.1 million options on futures. 

Options trading is unique because if done right, it can provide investors with opportunities for leverage, risk management, flexibility and diversification. 

Featured photo by Yiorgos Ntrahas on Unsplash.

This post contains sponsored content. This content is for informational purposes only and is not intended to be investing advice.

Disclosures:

Options trading entails significant risk and is not appropriate for all customers. Customers must read and understand the Characteristics and Risks of Standardized Options before engaging in any options trading strategies. Options transactions are often complex and may involve the potential of losing the entire investment in a relatively short period of time. Certain complex options strategies carry additional risk, including the potential for losses that may exceed the original investment amount.

Robinhood Financial does not guarantee favorable investment outcomes. The past performance of a security or financial product does not guarantee future results or returns. Customers should consider their investment objectives and risks carefully before investing in options. Because of the importance of tax considerations to all options transactions, the customer considering options should consult their tax advisor as to how taxes affect the outcome of each options strategy. Supporting documentation for any claims, if applicable, will be furnished upon request.