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From the very beginning of this Cash Course, I’ve said that you can make money in any market environment – whether it’s plummeting from a new round of tariffs, skyrocketing from a stellar earnings season, or doing nothing at all.
This seems to be counterintuitive to most investors – thanks, in part, to the suits on Wall Street. In fact, general consensus seems to be that you make money when the market moves higher and lose money when the market moves lower.
But, as you’ve seen, that’s just not true…
And since you now know how to filter out the top 2% of stocks, how to predict a stock’s next move, and why flipping stocks surpasses buying and holding shares on any given day, I’m going to give you the two easiest ways to turn a quick buck trading options.
So let’s get started…
The Difference Between Calls and Puts
First of all, there are two types of options: calls and puts.
A call option gives you the right to buy a stock at a particular price (strike) until a particular date (expiration). Buying a call is bullish. If the underlying stock goes up, calls increase in price.
Below is an example of what a call trade looks like on an options order form using SPDR Gold Shares (NYSE: GLD). Depending on the broker you use, your order form could look slightly different – but all of the information is the same:
The expiration date is the date by which the option can be exercised. Upon expiration, the option expires and cannot be acted upon.
The strike price is the agreed-upon price at which the underlying stock can be bought or sold.
The option type is just that – the type of option you’re trading, a call or a put.
The limit price is the most you want to pay to enter your trade. I never enter a trade without setting a limit price, and neither should you. After all, even the most lucrative pattern won’t do you any good if you pay too much to get in on the trade.
Now let’s talk about puts…
A put option gives you the right to sell a stock at a particular price (strike) until a particular date (expiration). Buying a put is bearish. If the underlying stock drops, puts increase in price.
Here’s an example of what a put trade looks like on an options order form:
ALWAYS Practice Trading in a Virtual Trading Account First
I know we already talked about this back in Part 5, but it’s that critical to your success…
Sometimes, the most challenging part of trading options is actually pulling the trigger. So what I suggest doing is placing your first few trades using your broker’s “virtual trading” or “paper trading” system. These allow you to enter, follow along, and exit a trade as per usual, but without using any money.
Now of course, that also means you can’t make any money. But it’s a great way to get acquainted with options in general, and your broker’s platform in particular. I recommend all my readers use paper trading until they get comfortable – in fact, I wish I’d used it back when I first got started with options.
If at any point you’re not sure what to do, don’t hesitate to contact your broker. As their customer, they owe you time on the phone to make sure you’re buying the option you want to buy.
And one last thing…
The Best Way to Diversify Your Portfolio
Your financial advisor has probably encouraged you to diversify your holdings by buying different stocks in different sectors, some commodities, some gold, and even some downside protection. But it’s difficult for the average investor with a limited budget to diversify in a way that truly cuts risk – experts say you should own somewhere between 25 and 30 stocks for it to really work.
That’s great – if you can afford it. But there’s another way to diversify that your broker or your financial advisor probably won’t tell you about, and it’s a great way to truly slash your risk.
The easiest way for individual investors to diversify is to have percentage of BOTH bullish and bearish trades in their portfolio whenever possible. If you are fully invested 100% one way or the other, the ramifications can be severe. All it takes is a single event – a bad jobs report, a stock market glitch in London, currency shenanigans in China, or heaven forbid some global catastrophe – to sink your entire portfolio.
Keep in mind that the markets have a tendency to fall in price faster than they rise, and usually by a much larger percentage. That means, when markets are going down, you can lose a lot of money very quickly.
Many investors are hesitant to put on bearish trades for one reason or another. But it’s a great way to cut your risk and balance your holdings.
In fact, I created a special bonus course exclusively for you, where I’ll show you how to do just that…
Click the green button at the bottom of this page to continue to Part 8.
Q. Which of the following will increase in price if the underlying stock or ETF goes up?
A. Put options
B. Call options
Q. How can you tell how long an option will last?
A. By following the latest stock news
B. By setting a limit price
C. By looking at the expiration date
Q. What’s the easiest way to diversify your options portfolio?
A. Never buying puts
B. Only trading ETFs
C. Trading both calls and puts