If you are a beginner or new to the land of trading, you may be thinking about how to do options trading or where to start. So before beginning investment, you should have factual information about trading.
Start by defining your investment objectives, including capital preservations, speculation, generating income, or growth.
Thinking about all these things will help you in options trading; maybe your broker has additional requirements, like disclosing the type of Options you want to trade, or they want to know your net worth.
And finally, you are ready to do options trading but always start with small. It is best to focus on assets you know well and the amount you are comfortable losing initially.
What Is Options Trading?
Trading options can be a bit complicated as compared to simple stock trading. So before starting you should know everything about options trading. As in simple stock trading when you buy a new stoke, you only decide how many shares you want in stock trading.
After that, your orders will be filled by a broker market price. But in options trading, you should know about advanced strategies for opening an options trading account with a few more steps than the regular investment account.
In Options trading, you not only speculate or gamble, but it will also protect you from the downside. Therefore, you should learn how to do options trading, as this will help you to generate income when the market is going down.
How To Do Options Trading: Steps To Follow
Trading options can be a bit complex, so it is essential to learn step by step. Here are 4 easy steps to help you become an expert in options trading.
1. Open An Options Trading Account
Before you start trading options, it is essential to open an account that will prove that you know what you are going to do. Opening an options trading account is slightly different if we compare it with a stock trading account.
To open an account, you need to give a large amount of capital, and also the brokers want to know more about the investor before issuing the permission slip. They will ask for your information which will include the following:
- Investment Objectives
This will include your income, growth, and capital preservation.
- Trading Experience
The broker wants to know your trading experience, including how long you have been trading. And the size of your trade which means how many trades you make per year?
- Personal Financial Information
This will include your equity, gross annual income, book value for shareholder’s equity, and employment records.
- Types Of Options You Want To Trade
You can trade several options, so make up your mind about which one you will be dealing with.
2. Which Option To Buy Or Sell
As a beginner, you will be given the right but not the responsibility to buy any stock at a strike price or predetermined price if you choose the call option. The second type is the put option, in which before the end date of the contract you can’t sell the shares at any stated price.
The type of option you will choose will be depended on the direction of stock:
- In case you think the price will increase you can buy the call option and sell the other one.
- If the stock price will stay stable as you think then sell or buy any option.
- In the third case if there is any chance that you think the price can decrease sell the call option and buy the other one.
3. Predicting The Option Strike Price
Buying any option will only remain valuable until the options expiration period closes the stock price in the money. Either above or below strike price will be included. But the first-ever thing you must do is predict where the stock will be during the options lifetime and then buy the option with the strike price.
4. Determine The Option Time Frame
When you choose the option for trading, there will be a time limit that indicates the last day until you can exercise the option. Mainly there are two styles of options American or European. The difference between both options is depended on the expiration date.
The investors with the American option will get access to exercise at any time until the expiry date. But the European option holders can only exercise on the expiry day, not before that. That’s why for traders, American options are more flexible.
Option Trading Requirements
If you are planning to trade options good news is that you don’t need a lot of money to start the trade.
You can also buy low-cost options and then trade them to make your money many times. But it is also possible that while swinging for the fences, you can also lose money.
So, if you are considering starting, you can begin options trading with a few hundred dollars. However, if you bet wrong, it also leads to a loss of your actual income in a week or month.
Better is to trade with a safe strategy, a long-term buy-and-hold investor. Now you can grow your wealth over time easily.
While options are associated with high risk but at the time you learn how to do option trading. This will be easy for you to make a lot of money but in a limited time. The above steps will guide you in creating an options trading account to determine the right time to trade options.
Once you have learned all the strategies and are finally ready to put in the time and start trading, remember the upside to option trading. While you will feel eager to jump in, keep calm and invest small, in which you are comfortable loos and betting again.
Options trading will seem to be a bit complicated at first, but when you finally learn it, nothing can stop you from earning. As a trader, you will also have the option to start with strategies with limited risk and trade safely.