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I'm fairly new to trading options. I have been trading stocks just as a side source of income and I've been exploring trading options. Would you guys be able to recommend any strategies I could begin with?

I'm a student so I don'y have a lot of cash to burn. I am looking at this opportunity to expand my knowledge and also increase my investment income.

Thanks

  • If you don't have a lot of cash why do you want to waste it on options trading? You will likely lose it all. – Pete B. Apr 24 at 11:37
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Succeeding with options requires a comprehensive understanding of how they function, their interrelationship with the underlying and good timing and selection. Without that, they will take your money. So without a lot of cash to burn and being fairly new to trading options, the last thing that you should be doing is trading options.

My first option trade was in 1982, buying calls of Commodore International, makers of the Commodore 64 computer. I quickly made money and I then rolled the calls up to a higher strike, buying slightly more. They made money as well. I tripled my money in a week which to me, was a lot of money then.

Unfortunately, I had no clue how fast options near expiration fall apart when the stock drops and implied volatility contracts, as well as the effect of accelerating theta decay. My profit was gone in almost the blink of an eye. I also knew nothing about risk management. Long story short, like me then, you're likely to be the deer in the headlights when it hits the fan unless you become financially literate.

Do yourself a favor and put this idea on the back burner. Read a few option books and then paper trade for a bit. Let the books be your tuition cost rather than the small amount of trading cash that you have. Good luck.

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I would start with defined risk verticals (where you know getting in what is the most you can lose).

There are 4 types of spreads. One example, if you are bullish, would be to sell an out of the money put, and then, to limit your risk buy a further out of the money put with the same expiration. The max you can lose is the difference between the 2 strikes minus the credit you get. That's called a bull put spread, but there are other names people use)

Selling a spreads makes the theta decay work in your favor (vs buying one).

For example, say you think the SPY is going to be higher on May 15, then you'd sell the May 15 250 put, and buy the May 15 247 put for a credit of $.44 (that's $44 given 1 option controls 100 shares), and your risk is $256 ($300 - $44). Which means you breakeven if the SPY closes 249.56, and make up to $44 if it closes above that. This is just to illustrate, not something I recommend you do! And if the market moves higher tomorrow, the credit will be smaller...

Once you get the hang of it, you could try Iron Condors (that's 2 verticals, one with puts, one with calls, but that's for an other day...). But there are hundreds of possibilities!

Tasty Trade has great explanations and tutorials that will cover the 4 types I mentioned above.

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