You have probably heard many times that options are a great way to make money with limited risk. Indeed, many option websites and infomercials make it seem as though regular folk can make a killing using option trading systems. Although I do not doubt that some people out there are making good money with various option trading systems, I have never seen one that is stable enough to be a reasonable source of income in the long term.
There are quite a few ways to make money with option trading systems. Some of the main ones are:
1. Buying Puts and Calls:
This is the most straightforward way to buy options, but also the most volatile. You are making a straight bet on which way the market will go, and if you are right, you stand to gain a lot, but if you are wrong, you could lose all your money. I would not recommend this kind of option trading system to anyone.
2. Placing Spread Trades:
A spread trade is basically when two or more options with different strike prices or expiration dates are traded simultaneously. Options trading systems that use spread trades are considered far more sophisticated than simple buying/selling of calls and puts. Using spread trades, a savvy investor can make money when the market goes up or down, or even when it stays flat. However, this does not necessarily make option trading systems that place spread trades less risky. I have seen plenty of spread trading systems that end up losing a lot of money in the end. Only the best will consistently make money with spread trades.
3. Using Options to Hedge:
This is the way most professionals use options, and the only way that makes sense in the long term. An option trading system that uses hedging may, for example, buy protective puts on long stocks that are owned, to guard against a sudden drop in the market. The best way to think about hedging with options is that it is a lot like insurance. If nothing happens, you lose the price you paid for the option (much like you lose the insurance premium), but if something goes wrong, the options you purchased will offer protection.