Many new investors just buy calls or puts as a cheaper way to speculate on the move of a stock, but without a proper understanding of how options are priced and investor will usually end up losing money investing with options.
The unique thing about options versus stocks is that you can make an adjust that allows you to stay in the position without taking a loss and still have a good return on the adjusted trade vs.
on a stock when you are wrong you just close out the trade.
Many investors don't realize there are dozens of various option strategies but one of the most exciting things about option trading is that there are strategies called directional neutral(or Delta neutral) that allow you to make money if the stock goes up or down, For example, if you think a stock will stay in a range then you could sell a call above the current price and a put below the current price while simultaneously offsetting those short options by buying a call and put at farther out prices to protect yourself in case the stock really made a big move.
Since you sold options with exercise prices closer to the current market price than the options that you bought it means then that you collected more premium on the sold options than the cost of the purchased options.
That difference in sold vs.
bought option premium is your profit and as long as the stock stays within the range of the options that you sold then you profit.
Also, realize that usually the options you sell expire within a short time period from when you sold them so you can keep initiating new trades every month for monthly income.
Direction neutral options strategies like the example above are usually focused on selling options with a controlled risk/reward and collecting the premium on those options as they near expiration.
These option strategies usually involve multiple legs where you buy and sell different options at the same time to control risk and collect a substantial return on investment in a short period of time if the stock stays in a trading range.
Understand though that the market doesn't always go the way you want it so it is essential in option trading to know how to adjust your positions so that you can continue to collect that premium without having to close out a losing trade every time.
Learning options trading like like the above example sounds a little confusing at first but when you use the software tools that are available for free now with many online option brokers, it becomes a little easier to understand.
Only in recent years do online option brokers, lower commissions and specialized software now allow individual investors to have the same tools that professional traders have had.
The amount of information on option trading is substantial and somewhat overwhelming to a new trader but with the proper foundation and understanding how to manage your option portfolio you can stop worrying about which direction the market is going and make money either way.
Learning to trade options like a professional will open up a new world of investing for investors.