The 3 Best Options Trading Strategies Most Profitable & Safest

Depending on the strategy employed, many day traders make tens to hundreds of trades per day, on average. With algorithmic and high-frequency trading (HFT) systems available, other day traders can make tens of thousands of individual trades in a single day (with the help of computers). To be labeled a pattern trader by your broker, however, regulators state that you need only make four-day trades over five business days. While day trading offers an entrepreneurial career route and a high profit potential, there exist some limitations and risks to the profession. These include high financial loss, emotional pressure, lack of access to certain markets, time commitment, and regulatory requirements. This means that day traders must have sufficient capital on top of the $25,000 to make a profit.

The maximum that rules permit a pattern day trader to trade in excess of the $25,000 maintenance margin. StocksToTrade in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, StocksToTrade accepts no liability whatsoever for any direct or consequential loss arising from any use of this information.

The risk involved in holding a position overnight could outweigh the possibility of a favorable outcome. That’s no easy task when everyone is trying to exploit inefficiencies in the markets. Next, understand that Uncle Sam will want a cut of your profits, no matter how slim.

What is the Most Profitable Type of Trading

Scan business news and bookmark reliable online news outlets. The United States stock market has come a long way since the turn of the millennium more than two decades ago. From 2003 to 2023, the benchmark S&P 500 has registered double digits annual returns thirteen times. The world of cryptocurrency is much bigger today, with a variety of coins and tokens with use cases that go well beyond being a medium of exchange.

What is the Most Profitable Type of Trading

To select stocks for this list, we used the FinViz stock screener to identify companies with high gross margins and net income. The Finance Charts database was then used to identify firms with the best net income growth in the past twenty years. The analyst ratings of each stock are also discussed to provide readers with some context for their investment choices. The hedge fund sentiment around each stock was calculated using the data of around 900 hedge funds tracked by Insider Monkey in the fourth quarter of 2023.

Leap options are our favorite options strategy due to reward and risk. The upside potential greatly outweighs the downside but there as some things to be aware of before blindly buying these long-term options, which we will discuss next. Due to all of these factors, this is a mid-rated strategy from our perspective. The covered call option can generate income potential lower risk but does fail to fully protect the trader when the stock falls. The one downside to a covered call as protection is that the call option does not protect the investor from all losses. More or so, cushions the fall as the stock goes through a correction or recession.

Also, as a beginning day trader, you may be prone to emotional and psychological biases that affect your trading—for instance, when your capital is involved and you’re losing money on a trade. Experienced, skilled professional traders with deep pockets can usually surmount these challenges. An overhead view of a bustling stock exchange, with brokers and traders exchanging stocks. Since Bitcoin’s debut more than a decade ago, many new types of cryptocurrency have emerged.

With a top-rated options alert service The Trading Analyst. An example of this strategy is if an investor is long on 100 shares of IBM at $100 as of January 1. The investor could construct a protective collar by selling one IBM March 105 call and simultaneously buying one IBM March 95 put.

  • Many brokers and trading platforms allow users to trade various asset classes, including forex (foreign exchange) and cryptocurrencies like bitcoin, ethereum, and others.
  • One more reason is that forex is a more liquid market for short-term traders.
  • Using a stop loss can take some of the stress out of trading since we know we will only lose X amount on any given trade.
  • If you own 100 shares or more of any stock, you should be selling covered calls.

In the P&L graph above, notice how the orange line illustrates the two break-even points. This strategy becomes profitable when the price of the stock, either up or down, has significant movement. The investor doesn’t care which direction the stock moves, only it moves enough to place one option or the other in-the-money.

This strategy has both limited upside and limited downside. Theoretically, this strategy allows the investor to have the opportunity for unlimited gains. At the same time, the maximum loss this investor can experience is limited to the cost of both options contracts combined. An investor may choose to use this strategy as a way of protecting their downside risk when holding a stock. This strategy functions similarly to an insurance policy; it establishes a price floor in the event the stock’s price falls sharply.

What is the Most Profitable Type of Trading

However you decide to exit your trades, the exit criteria must be specific enough to be testable and repeatable. Just as with your entry point, define exactly how you will exit your trades before you enter them. The exit criteria must be specific enough to be repeatable and testable.

With calls, one strategy is simply to buy a naked call option. This is a very popular strategy because it generates income and reduces some risk of being long on the stock alone. The trade-off is that you must be willing to sell your shares at a set price—the short strike price. To execute the strategy, you purchase the underlying stock as you normally would, and simultaneously write—or sell—a call option on those same shares. With day trading, there is a high propensity for financial loss, particularly when leverage is involved. This is in addition to any fees and commissions that the day trader already has expensed when entering and exiting positions.

Those 3 options trading strategies have a place in even the most conservative portfolios which is why I believe they are the 3 best options trading strategies everybody should know. And since you’re acquiring shares for less than you would by buying them outright, this is one of the safest options strategies. The second biggest problem for option buyers is that while options give you leverage (one contract represents 100 shares of stock), that leverage is worthless if your contracts expire worthless. Buying OTM calls gives you great leverage, but the probability of profit is incredibly low. For example, this strategy could be a wager on news from an earnings release for a company or an event related to a Food and Drug Administration (FDA) approval for a pharmaceutical stock. Losses are limited to the costs–the premium spent–for both options.

If from a fundamental development, such as an economic data report or a comment by a Fed official, your trade is based on those fundamental factors, and your trading plan should reflect that. If your trading plan relies on technical analysis, such as remaining above the 50-day moving average, again your strategy should rely on that. The key is to adjust your position size to give yourself enough room to stay within the stop loss and not risk everything in a single position. Finally, keep in mind that if you trade on margin, you can be far more vulnerable to sudden price movements. Trading on margin means borrowing your investment funds from a brokerage firm. It requires you to add funds to your account at the end of the day if your trade goes against you.