Can Options Trading Make You A Millionaire?
This is one of those questions that I hear from people new to options trading all the time and it is not an easy question to answer in my opinion. Sure, options trading can create millionaires and many, myself included, have done over a million trading options. However, can options trading make YOU a millionaire?
In a way, asking this question is just as good as asking questions like:
Can stock trading make you a millionaire?
Can futures trading make you a millionaire?
Can Forex trading make you a millionaire?
Can selling hamburgers make you a millionaire?
Can collecting coins make you a millionaire?
The answer to all these questions is a resounding YES.
The problem is, can YOU become a millionaire by doing these things that have made OTHER people millionaires?
First of all, let’s determine the theoretical possibility of making a million through options trading. Let’s say you have $5000 to start trading options and earn an average of 50% per trade and increase your profit. This is the status of your account after several transactions:
After the first trade – $7500
Second – $11,250
Third – $16,875
Fourth – $25,312.5
Fifth – $37,968.75
Eighth – $128,144.5
Fourteenth – $1,459,646
As you can see, it only takes 14 trades with a 50% profit per trade, which is not much in options trading, to turn $5,000 into a million. If you do just one of those trades per month, it will only take you a little over a year to become a millionaire. As such, becoming a millionaire with options trading is clearly not out of the realm of possibility and clearly very quick if you do it right.
That brings us to the next question: can you produce a series of 14 consecutive wins at 50% per win? Clearly, there is no easy answer to this either. I’ve heard of extremely lucky people doing that before, but that’s clearly not something that applies to everyone.
Yes, in my 15 years of options trading, I have to say that I have never seen anyone make a series of 14 profits in a year or two without losing, no matter what options strategy they use. The good news is that you don’t need to make 50% of every profit nor do you need a series of 14 profits to make a million in options trading, as long as you follow a sensible trading methodology and have a lot of patience.
Making a million in options trading is not about not losing. It really is about making more wins than losses. As long as you have the means to consistently outperform wins than losses, you can make a million on anything, as long as you have the patience to stay in the game. Yes, this is the same logic in any form of trading.
If it’s the same in any form of trading, why then option trading?
The beauty of options trading is that it actually helps you achieve more profit than loss through 2 unique means; Convexity and Versatility.
Convexity means being able to potentially earn more money than you can potentially lose. In futures trading or stock trading, you can potentially lose as much money as you can win. When the stock goes up $10, you make a profit of $10, and if the stock goes down $10, you have a loss of $10. There is no convexity. When you buy options, their value will increase as long as the stock continues to go in the right direction (up for call options and down for put options), but if the stock goes the other way, you’ll only lose as much as you used in the purchase of options, nothing more! For example, if you bought a call option contract on a stock for $150 and the stock went up $10, your call options would be worth $1000, but if the stock went down $10, you would only lose the $150 you used. That is convexity. As long as you use only the money you can afford to lose or the maximum amount you are willing to lose on any single trade towards call options, you will always have the advantage of convexity on your side.
The versatility is found in the wide range of option strategies that can be combined. Many option strategies allow you to profit not just when the underlying stock moves in one direction but in multiple directions! Yes, in futures or stock trading, you only make a profit when stocks go up or down (when you are short stocks or futures). However, in options trading, there are option strategies that allow you to profit when stocks go up OR down in both directions and option strategies that even allow you to profit in all 3 directions. Yes, being able to take profits in more than one direction greatly increases your chance of winning and greatly improves the chance of making more wins than losses on a consistent basis!
So, can you become an options trading millionaire? If you can. In fact, from the convexity and versatility properties mentioned above, trading options could make it easier for you to become a millionaire compared to trading stocks or futures. As such, the possibility is there and the odds are in your favor. The last question to answer is, do you have what it takes to become a millionaire through options trading?