You can make a lot of money with options when you time a quick and big move correctly.
If you time a quick AND big move correctly, instead of getting 10% return on the underlying stock, you could get 50% or even 100% return on weekly options. But if you time a big move wrong, you could lose it all.
The term “big” is a relative term —-relative to what implied volatility is saying the expected size of a daily move will be. But we will save that for a future topic. For now let’s say that a 10% return is considered a big move – which is usually the case for almost any asset. A $100 stock becomes $110 (a 10% return) – but that 10% jump happens over what period of time? How long it takes makes a difference. If that 10% move happens in one day and you choose the nearest term weekly option to bet that that 10% move will happen in this upcoming week, well, that that 10% move in the stock can easily make the call option go up by way more than 10% — 50% to 150% is entirely possible (depending on specific option you choose). This is an example of timing a big move correctly within a couple of days and being rewarded for it.
BUT if you time it wrong and that 10% move doesn’t happen this week. Instead it happens next week, well your weekly options, if you choose the wrong out-of-the-money option, could expire worthless — meaning you lose your full investment. This doesn’t happen with all options, but it’s definitely something to keep in mind.
Now that 10% move — if that 10% move doesn’t happen quickly – say it happened over the course of an entire year rather than in a few days and you had 1 year options, well, your call options would NOT reward you with 50% or 150% moves. Instead, you might only get 5% — or maybe even 0% breakeven due to time decay on those options over the course of an entire year.
You see, this is how options incorporate a time element–something that stocks themselves don’t do. How quickly a move happens in the underlying stock affects what kind of returns you can get with options. Time a big and quick move correctly in the near term and you can get those big returns. But time it wrong, and you could lose it all.
If it’s a big move but it doesn’t happen quickly, and instead happens slowly, you won’t make that much either. The real power of options — at least on the buying side — is on these quick and big moves. Timing the market is not easy. But if you are able to get the timing right — you can make some serious money with options.
To learn more about these check out the other videos in the How To Make Money With Options video series with .com. Make sure you subscribe to our youtube channel and visit our website for daily stock market updates on the S&P500 – and learn how to make $1,000 every week using options and futures.