The Options Trader's 2022 Outlook: It's Going to Be a Very Lucrative Year!

Trading options is far from a new idea. 

The first options contracts were created by the Greeks thousands of years ago to earn extra income during the olive harvest. In London, options trading began in the early 1870s. Here in the U.S., thanks to Russell Sage, investors have traded options contracts since 1872.

That said, most retail investors have steered clear of this exciting and lucrative market. Only recently has options trading become popular with everyday traders. A report from Business Insider notes:

In 2020, options trading reached a record level: 7.47 billion contracts were traded, according to the Options Clearing Corporation.

Simply put, 2022 is going to be a very lucrative year for options traders. 

If you’re serious about investing, the options market is a sector you should strongly consider entering. Because with the proper, quality information, you can join in on the options profit party too.

Options 101

A stock option is a contract that gives an investor the right (but not the obligation) to buy or sell an underlying security (stock, ETF, or index fund) at a predetermined price up to a certain period of time.

But first, a few important notes and definitions you need to understand before we can begin trading options with success.:

1. One options contract represents the right to control 100 shares of the underlying stock. You must know this in order to calculate the premium on the options contract and potential profitability of our trade.
2. The premium is the cost you pay to own one options contract. Most options pricing is listed online on a per-share basis. That’s why traders often say things like “This option is trading for the low price of $0.50.” What they don’t tell you is that’s not the actual price of the options contract, aka the premium paid. Because options contracts control 100 shares, that $0.50-per-share cost actually means a total cost (your premium) is $50 per contract. Moreover, to calculate your total profits, you must subtract the premium cost from your earnings on each trade.
3. The strike price is the price the option’s underlying security needs to reach in order for your trade to be successful (although there are exceptions to this with more complex strategies).
4. Lastly, the expiration date of an option is the final date at which the owner of the options contract can exercise their right to buy or sell.

Another important thing to know about stock options is that the value of a stock option is derived from the value of its underlying security (be it a stock, ETF, or index fund), and you can trade (buy or sell) these contracts on an “options market.” 

This is why options trading is a “derivative trade,” or sometimes called derivative trading. An options contract’s value is derived from the underlying asset. Because of this, in most cases, the value of an options contract moves in the same direction as its underlying security.

Here’s an example from a recent 207% win my readers cashed in on trading Chevron Corp. (NYSE: CVX) options in October. 

Credit: Yahoo Finance

As you can see in the two charts above, the options contract price on the left closely mirrors the actual stock price of CVX over the same time frame. This correlation is the key concept to trading options.

This correlation between the stock price and options price also guides our decision-making as to what types of options contracts to buy or sell. If we’re bullish on a stock and believe it will go up in price, we can buy “call options.” If we’re bearish on a stock, we can buy and sell “put options.”

The difference between the two is pretty straightforward. 

Call Options Versus Put Options

A call option is an options contract that gives the investor the right — but not the obligation — to buy a stock or other security at a certain price by a specific period of time. A call buyer profits when the underlying asset increases in price. 

For example, if I believe Stock XYZ, which currently trades for $35, will rise to $45 in a short period of time — say, two months — I would buy Stock XYZ’s $40 call options that expire two months from my purchase date. For this example, we’ll say the cost of this option is $1.50 per share for a total premium of $150 total per contract. 

If during those two months Stock XYZ reaches $45, I can “call back” the stock and receive those 100 shares at the contracted price of $40, and then immediately sell those shares at the market price of $45 for a nice flash profit. In total, your profits would be (earnings per share x 100) – premium paid, which in our example is ($5 x 100) – $150 = $350.   

In contrast, put options are options contracts that traders buy and sell when they’re bearish on an underlying stock or other security. A put option gives the holder the right — but not the obligation — to sell a specified amount of an underlying security at a specific price within a specified time frame.

For example, Stock ABC is trading for $40 a share, and you believe the price will decline from there. Puts with a strike price of $40 are available for a $3 premium and expire in two months. Buying a put option in this case would give you the right to sell at your strike price of $40 within those three months, even if the stock price falls below that amount, which you’re hoping it will. 

Assuming the underlying stock falls as predicted to $30, your earnings would be $10 per share, or $1,000 in total. Your total profits would be total earnings minus the premium paid ($300 in this example), for a total profit of $700. 

Not too bad for a trade you’re in for only two months! And those are only two of the many bull and bear strategies you could employ as an options trader.

That’s all the more reason why options trading is garnering massive intrigue from retail investors. Not only are there numerous ways to make money whether the market is up, down, or trending sideways, but the entry costs to own 100 shares of expensive companies are surprisingly low when compared with owning these same companies outright.

For example, it would cost me around $320,000 to own 100 shares of Amazon.com Inc. (NASDAQ: AMZN) right now. But if I were bullish on the stock and thought shares would hit $3,400 in a few months, I could buy AMZN calls with a $3,400 strike price expiring in a few months for a much more reasonable premium of $5,900. Then I would control 100 shares of AMZN until my contract expires.    

That’s the true beauty of options trading. You can trade the most expensive stocks with little startup cash and still lock in triple-digit gains in hardly any time at all!

Now an Update on Our Open Options Trade

Before we part for today, I want to update you on our most recent trade, the DraftKings Inc. (NASDAQ: DKNG) October 2021 $57 call(s) expiring October 22, 2021. 

I recorded a special video alert highlighting the recent action in the stock market as well as what to do in the wake of the volatility.

If you’re just interested in our DraftKings update, you can skip forward to approximately the 2:30 minute mark.

And lastly, if you’re looking to capitalize on the recent surge in energy and oil stocks, I have a brand-new options trade on Chevron Corp. (NYSE: CVX) teed up and ready for you to act on. 

Click the image below to view the video.

Have a great weekend.

To your wealth,

Sean McCloskey
Editor, Energy and Capital

@TheRL_McCloskey on Twitter

After spending 10 years in the consumer tech reporting and educational publishing industries, Sean has since redevoted himself to one of his original passions: identifying and cashing in on the most lucrative opportunities the market has to offer. As the former managing editor of multiple investment newsletters, he's covered virtually every sector of the market, ranging from energy and tech to gold and cannabis. Over the years, Sean has offered his followers the chance to score numerous triple-digit gains, and today he continues his mission to deliver followers the best chance to score big wins on Wall Street and beyond as an editor for Energy and Capital.