How to Get Rich With Options

by Peter Halpin

Exchange traded options are simply a wonderful investment vehicle, because they are just so flexible. If you buy shares, you usually do so with the hope the price of the share will rise over time and you will make a capital gain. But if the market goes against you and the price begins to drop, you are then faced with the "buy, hold and pray" scenario, where you have to wait it out until the price, hopefully, will move back to your original entry price.

Options are not like this. They are not uni-directional investments. If you know how options work, you also know that positions can be easily adjusted to accommodate what the market is telling you. Options are also much more interesting than buying shares or CFDs because they contain a greater variety of components. I'm going to show you how to get rich with options.

We need to discuss option characteristics, which are not available when just buying and selling stocks.

You can create an option contract out of nothing. This is called "writing" an option, which is another way of saying you're "selling" it to the market. So you create, or write, an option contract and sell it to the market, all in the same transaction. This now gives you the choice whether you want to be on the buying or writing end of a market deal.

All option contracts have an expiry date. This being the case, the price of any option includes a "time to expiry" element, as well as any "intrinsic value" due to market price movements. Because the price of an option decays at an exponential rate as the expiry date draws nearer, you can take advantage of this factor by being on the writing rather than the buying side of the market. This is vital information if you want to know how to get rich with options.

Options can be used to take advantage of either an upwards, downwards or sideways move in the market price. Call options increase in value as the price moves north, put options do the same as the underlying security price drops. If you think the share, commodity or currency price is about to make a large move, but in recent times it has been moving sideways, you can buy the same quantity of both calls and puts and make a profit from whichever way the price eventually moves. This is called a "straddle".

You buy these when the option price is relatively low and you need to allow enough time to expiry (at least 90 days) for them to do their job - but with the right chart patterns, they work well. We say this only to demonstrate the flexibility of options. There is a better way than this, how to get rich with options.

Now, here's where it gets interesting. If we were to imagine a graph, options contain both vertical and horizontal components. The vertical component is the price movement; the horizontal component is the "time value" based on impending expiry. Combining these two elements with the ability to write (create, sell) as well as buy options, gives us all the flexibility we need to get rich with options.

The ability to write (sell) options, allows us to create positions with very low risk, which can be easily adjusted if the market turns against us, until conditions are better to produce a profit. Combine this with good money management and you can't go wrong.

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