Options trading is a lucrative venture if you play your cards right. There are a lot of people who have made a serious profit from smart choices, but, as with any form of trading, there is always an element of uncertainty to navigate as well. Understanding the ‘smart moves’ vs the ones to steer clear of is the optimal way to dive into this world, so here’s what you need to know.
Picking an Options Trading Account
The first thing you need to know about an options account is that you will need a higher capital investment than for example with a stock broker arrangement. The second thing you need to know is that any broker worth the money will have a lot of questions, every single one of which will be entirely relevant for them to conduct a thorough assessment of trader viability and liability. You will be asked the following:
- Objectives and goals for the days ahead.
- Experience you have in the trading world.
- Select options that you wish to commence trading in.
- Your net worth and proof that backs it up.
Accept There Are Complexities Ahead
Options trading is not for the faint-hearted. For beginners stepping into this platform, there is a lot to learn and an equal amount of risks to navigate. As mentioned before, any broker you hope to collaborate with will be ready to complete a full profile about how well-adapted you are for this challenge and whether or not they can vet you as a trader. This is because it is a complicated sphere and it takes a whole range of financial, market, and risk knowledge to make strong decisions. Do you know what a call is? Can you tell the difference between a put and a spread? All of these will determine whether or not you are able to start trading in stocks and other assets.
Read Advice From the Experts
Reading advice and watching media from experts like an experienced options trader help you get to know the trade a whole lot quicker and absorb tips and tricks that you wouldn’t have access to elsewhere. Find a mentor who can help guide you; it’s the best way to learn the ropes.
Pick Your Options
The smartest move of all will be how you pick your options and what they end up being. They are called options because that’s what they are: Potential trades that sit in stasis until a shift occurs. Ultimately, you have three choices to make that will determine which way you move.
Prediction: Stock Price Goes Down
If your move is that you think the stock price will go down at a date in the future, you will always buy a put option and sell a call one.
Prediction: Stock Price Stays Stable
When you assess a stock price as retaining stability price-wise, then you can either sell a put or sell a call.
Prediction: Stock Price Goes Up
For any prediction regarding a stock price going up at a determined date, it is realistic to buy a call option and sell a put one.
Determining the Strike Price
Of course, once you have these decisions set in stone, the strike price is the next big decision. This is based on the predictions you make in round one. When you think a price will go up, you call it and if the option ends within the predicted range, i.e. ‘in the money’, you’re fine and the option remains a stable investment. If you trade in too many ‘out of the money’ options, you risk losing capital and every investment.
The Beginner’s Path
If you are feeling confident enough to dip a toe into the water, starting with a strong position will boost your confidence (and your chances). This means, focusing on what you know and building from there. It is essential that you select a broker, and do so carefully so you have the best possible chance of making your mark in this world. It is not an option to go it alone until you have enough experience under your belt to be able to successfully analyze the market without doubting your assumptions. The first purchase should always be a call or a put, and think carefully about this decision.
The truth is, options trading is an acquired taste. While there is money to be made, there is also money to be lost. It is all down to what you know and how you apply it.
