Getting started in listed options trading can seem a daunting task at first. There are a lot of new words and concepts to learn and a lot of things you need to be aware of and implement. Options trading is one of the several ways to invest, but it may seem complex, especially for new individuals.
It is prudent to start by practicing, but before you start, you’ll want to familiarize yourself with the following essential steps:
Choosing a Brokerage
You will need to choose a brokerage that offers listed options. To start trading listed options, you need a broker. The broker helps you buy or sell the listed options. A reputable and well-established brokerage will be able to provide you with the information and resources you need to get started.
Before you start your search, consider your situation and how you plan to use your investment account. It is also paramount to carry out an appraisal of the broker regarding their customer service, commissions, and the available tools and resources that they provide. In addition, you may need to check online reviews and ratings to avoid falling for spammers.
Opening an Options trading account
To kick off your trading, you need a trading account with an online broker. Online brokers charge no commission and usually offer low trading fees. In addition, many online brokers offer trading platforms with free downloadable software that you can use to trade directly from your personal computer.
Picking Options to Buy or sell
Options trading is the art of making money by betting on the future performance of stocks. While traditional investing focuses on a company’s long-term prospects, options trading allows you to speculate on short-term price movements.
Options are not only contracts to buy or sell a stock, but can also be used to hedge against losses. For example, when a trader buys an option, he effectively bet that the price at which the stock will be trading in the future will be higher than the amount he paid for the option.
Options provide a way to speculate on how the stock will perform in the future. If it’s going up, you buy a call option, and if it’s going down, you sell a put option. The options contracts are traded on an exchange, and are listed and traded just like stocks.
You can change the trading instructions in an option contract. For example, if you buy a call option, you can instruct the broker to sell the stock at a higher price within a fixed period. If you go for a put option, you can order the broker to buy the stock from you at a lower price within a specified period. Finally, if you short the stock, you can instruct the broker to borrow shares, sell them, and return them to you at a higher price within a fixed period.
Options give us a way to speculate on how a stock will move without having to buy stock. Stock is like a contract; you buy a contract, and the seller promises to deliver a specific number of shares to you.
Predicting the Strike Price
Before you can predict the strike price, you have to understand the dynamics of options trading. Very sophisticated investors trade options contracts and you have to be able to understand their business.
In options trading, the payoff is paid out not upfront but over time. It is the difference between what you receive when you sell an option and what you pay out when you buy an option. The payoff for an option is relatively small, and you have to pay a lot for it. So the option only becomes valuable if people are willing to pay more for it than they are willing to pay.
Determining the Option’s Time Frame
Many traders make the mistake of exercising their options too early. As a result, they miss out on the profits from the option. The time frame of an option is the rate of time decay, also known as the time value premium. The premium is a function of the option’s strike price, the period the asset’s price will change, and the underlying asset’s price.
If you are interested in trading listed options, it is prudent to look for the best source of information before you start trading. Nonetheless, there is no shortage of websites and books which can teach you more about trading options.