TMCnet Feature
August 05, 2020

How to Get Started Trading Options

Options are contracts that give you the right to buy or sell a stock at a specific price within a set timeframe. Options trading can be a lucrative investment if you can correctly predict the direction of a stock. Learn how to get started on trading options in this guide.

Choose and Contact a Broker 

When choosing a broker, it's important to find someone who can offer ample support and guidance in your trading decisions. Use these tips when looking for an options trading broker:

  • Put their customer service to the test. Call their help hotline or send them a direct message with some general questions. This can help you determine if they offer quality customer support. 
  • Learn what they have to offer. A quality broker will have educational resources like over-the-phone support, in-person meetings, webinars, and online courses. 
  • Explore their platform. Most broker firms use some kind of website, app, or software for trading. Make sure whatever platform they use is easy to navigate. 
  • Look at commissions prices. You need to decide if the services a broker offers are worth their rate of commission. See if they have any special discounts for new investors.

Predict the Direction You Think the Stock Will Move

The type of options contract you choose is based on where you predict a stock will go. For instance, if you predict a stock's price to fall, it's wise to invest in a put option. With this type of contract, you get the right to sell a stock at a set price prior to its expiration date. If you think a stock's price will rise, you may want to invest in a call option. This gives you the right to buy a stock at a set price within a predetermined time frame. 

Anticipate Changes to the Stock Price

The only way you can make money off an option is if the stock price rises or falls within your set timeframe. Traders call this "in the money." A call option is valuable if it's above the strike price — the amount at which an option can be bought or sold — while a put option needs to be below the strike. When you anticipate the change in price correctly (or at least close to your desired price), you can reap some major benefits. 

Pick a Time Frame for the Stock to Move

When choosing an expiration date for your option, consider its rate of decay. Remember that this is the last day you can exercise your right to buy or sell a stock at a set price. When choosing a date, your choices are limited to a few dates. They can range from days to months and years. As a new trader, it's best to stay away from daily or weekly trades since they tend to be the riskiest. Investing in long-term options gives the stock more time to reach your anticipated price.

When beginning to trade options, the process may seem a bit daunting. As you learn how to assess your risk and make smart investments, you'll soon realize that options are a great way to enhance your portfolio.

» More TMCnet Feature Articles


» More TMCnet Feature Articles