Can options trading turn you into a millionaire?
This is one of those questions I hear from people new to options trading all the time and not an easy question to answer in my opinion. Sure, options trading can create millionaires and many, including myself, have made more an a million trading options. However, can options trading turn YOU into a millionaire?
In a way, asking this question is as good as asking questions like:
Can trading stocks turn you into a millionaire?
Can trading futures turn you into a millionaire?
Can trading Forex turn you into a millionaire?
Can selling burgers turn you into a millionaire?
Can collecting coins turn you into a millionaire?
The answer to all of these questions is a resounding, YES.
The problem is, can you become a millionaire doing these things that have made OTHER people millionaires?
First of all, let's ascertain the theoretic potential of making a million through options trading. Let's assume you have $ 5000 to start trading options with and you make an average of 50% per trade and compound your earnings. Here's your account status after a number of trades:
After first trade – $ 7500
Second – $ 11,250
Third – $ 16,875
Forth – $ 25,312.5
Fifth – $ 37,968.75
Eighth – $ 128,144.5
Fourteenth – $ 1,459,646
As you can see, it takes only 14 trades at 50% profit per trade, which is not a lot in options trading, to grow $ 5000 into a million. If you do only one of those trades per month, it takes you only slightly more than a year to become a millionaire. As such, becoming a millionaire from options trading is clearly not outside the realm of possibility and clearly very fast if you do it right.
That leads us to the next question, are you able to produce a string of 14 straight wins at 50% per win? There is clearly no easy answer to this as well. I have heard of extremely lucky people who has done that before but that clearly is not something that applies to everyone.
Yes, in my 15 years of options trading, I must say that I have never seen anyone make a string of 14 wins within one year or two without losing any matter what options strategy they use. The good news is, you do not need to make 50% on every win nor do you need a string of 14 wins to make a million in options trading as long as you follow a sensible trading methodology and have lots of patience.
Making a million in options trading is not about not losing. It's really about making more wins than losses. As long as you have a means of consistently making more wins than losses, you can make a million in anything as long as you have the patience to stick to the game. Yes, this is the same logic in any form of trading.
If it is the same in any form of trading, why then trading?
The beauty of options trading is that it actually helps you achieve more wins than losses through 2 unique means; Convexity and Versatility.
Convexity means being able to potentially make 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 by $ 10, you make $ 10 worth of profit and if the stock goes down by $ 10, you sustain $ 10 worth of loss. There is no convexity. When you buy options, they will go up in value as long as the stock keep going in the correct direction (up for call options and down for put options) but if the stock goes the other direction, you will only lose as much as you used in buying the options, nothing more! For instance, if you bought one contract of call options for a stock for $ 150 and the stock went up by $ 10, you call options would be worth $ 1000 but if the stock went down by $ 10, you would only lose that $ 150 that you used. That's convexity. As long as you use only money you can afford to lose or the maximum amount you are willing to lose on any single trade towards buying options, you will always have the advantage of convexity on your side.
Versatility is found in the vast array of options strategies that can be put together. Many options strategies allow you to profit not only when the underlying stock moves in one direction but in multiple directions! Yes, in futures or stock trading, you only profit when the stock goes up or down (when you are short the stock or futures). However, in options trading, there are options strategies that allow you to profit when the stock goes up OR down in both directions and options strategies that even allow you to profit from all 3 directions! Yes, being able to profit in more than one direction greatly increases your likelihood of winning and greatly gains the possibility of consistently making more wins than losses!
So, can you become a millionaire trading options? Yes you can. In fact, the properties of convexity and versatility mentioned above, options trading could actually make it easier for you to become a millionaire versus stock or futures trading. As such, the possibility is there and the odds are in your favor. The final question to answer is, do you have what it takes to become a millionaire through options trading?