If you are just entering the trading game, or are interested in trying some new trading strategies, you may want to consider looking into options trading. This type of trading offers the potential to produce large profits and boost your net worth significantly. Let’s take a closer look at how to trade stock options and get the most out of this trading method.
What is Options Trading?
So what are options exactly? These are essentially contracts that provide you the right to buy or sell a particular security at an agreed upon “strike” price by a certain date. They can be divided into two types: call options and put options
Call Options
Call options offer you the right to purchase a security at an agreed upon price before a specified date. You may consider using a call option if you expect the value of the security to increase in the future, allowing you to purchase it at its current low price.
Put Options
A put option offers you the right to sell a security at a given price before a specified date. This option may be useful if you expect the value of the security to drop in the future.
Why Use Options?
Stock options trading is preferable to direct asset buying and selling for a variety of reasons. These include:
Lower Risks
Options trading can be considered less risky when done correctly than direct asset trading as it offers you a chance to observe how the price of a security changes before going ahead with buying or selling. This makes options less of a financial commitment than ordinary equities.
Cheaper than Ordinary Stocks
Options also tend to be less expensive than their corresponding securities. Since a single stock option offers control of 100 shares, it will be much cheaper than purchasing 100 shares. This is because you are essentially paying to enter into a trade rather than to purchase the stocks themselves.
For example, if a company is currently trading at $75 per stock, you would need to pay $7,500 to acquire 100 shares. However, if you purchased the call option that is being offered at $30, you would need to pay only $3000 for control of 100 of the company’s shares. This route saves you $4500, which can be invested elsewhere.
Increased Returns
By purchasing options, you gain control of stocks at a cheaper price than normal while reaping the same level of profits. This means your rate of return will be higher for options compared to ordinary stocks.
Flexibility
Options also offer greater flexibility compared to buying or selling stocks. You can use a variety of different advanced strategies to meet your investment goals. Professional traders use advanced strategies frequently. However, casual traders can also make use of these strategies if they possess the right knowledge.
How Can I Start With Options Trading?
If you are interested in starting with options trading, you may find it helpful to follow these steps.
Get a Brokerage Account
The first step for any prospective options trader is to open a brokerage account. This account enables you to enter your transactions for buying and selling. You can open a brokerage account on online platforms, or you can choose to go with an ordinary account at your preferred broker. You can also perform commission-free investing using apps such as Robinhood.
It’s important to do the appropriate research before selecting a brokerage, as each one may charge a different commission on their options trading. However, it’s also essential to consider the track record for your choice of brokerage.
It may also help to look up reviews for each brokerage online and see what their past clients have said about their services. Many brokerages tout themselves as the best, but their past clients may offer a different perspective.
Apply for Approval for Trading Options
You will need to apply for approval from your brokerage before you can buy or sell options. Each firm has its own requirements for clients, so you should get in touch with yours and fulfill their requirements.
Most brokerage firms simply want their clients to be aware of the risks of options trading, which is why they have set up these requirements.
Practicing
Before moving onto actual options trading activities, it may help to practice without actually buying or selling options. Consider trying some “pretend” trades with the help of a virtual options trading simulator. This practice stage can be important, as actual options trading can be risky and lead to significant losses if you aren’t prepared.
Start Trading
Once you are more confident with practice trading, you can move onto the real thing. It’s best to start small before working your way towards larger trades. During this period, it may help to assess your strategies closely, and see if there is any way to improve your returns.
Ready to begin? Here are some basic options strategies for you to start learning.
Try Advanced Strategies
Selling call options is a great way to earn monthly income. However, using this strategy in isolation does create the risk of huge losses. You can manage the potential risks and rewards of options trading by using some more advanced strategies.
You may already be aware that it is impossible to predict the future of markets. However, specialized options trading strategies enable you to carry out buying and selling with confidence.
Options trading becomes especially powerful when you learn to use multiple options contracts to your advantage. This includes strategies such as selling “covered calls” or utilizing “credit spreads”.
A covered call is a strategy in which you already own 100 shares of the underlying asset, thereby enabling you to collect your monthly income from selling calls while remaining protected from large losses if the stock skyrockets.
Is Options Trading Worth It?
Getting into options trading isn’t difficult. However, prospective traders should be aware of the high risk high reward nature of this trading game. This makes options trading a double edged sword that can be tricky for some traders to wield safely. If you wish to customize these risks and achieve your financial goals, it is crucial to be aware of the various strategies out there.
The most successful options traders are always looking for new ways to maximize their profits through advanced trading strategies. So it may help to keep an open mind and learn from others.
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