Options trading are when you are planning to buy or sell an asset at a pre- negotiated price at a certain future date. Trading in stock options can turn out to be a complex task, even more when it is the case of stock trading. The moment you are planning to purchase a stock you decide on the number of shares that you want and whether the broker is able to fulfil the commitment at the prevailing market price or not. So it is better if you learn options trading before you venture into this domain.
This form of trading requires a fair understanding of the advanced strategies. When you are planning to open an options trading account it would mean a few more steps in comparison to open a typical trading account. Options can be used to speculate and gamble, and a better strategy is to protect your downside. It is an effective way to generate income when the market is not witnessing an upward movement.
Options trading in a few steps
Open an options trading account
Before you are starting off with options trading you need to be aware of what you are doing. It is different from a normal trading account as it requires major capital investment. Taking into consideration the complexity associated with predicting multiple parts, brokers need to know a little bit more about an investor before giving them an approval for investing. People who know the market and have sufficient time to give to the market are well equipped with options trading rather than a beginner.
It is a difficult task and you need to be on top of your mark throughout the day. A brokerage firm analyses a traders portfolio, their ability to understand risks and consider the financial details. Such deals will be documented in an options trading agreement that is subject to approval from a stock broker. Based on the answers that you provide a broker provides you with an initial trading level that is based on the risk levels. 1 would be the lowest risk and 5 is the highest.
Determine which are the options you intend to buy or sell
For a fresher a call option is a contract that provides you with a right, but it is not an obligation in any form. It is referred to as the strike price within a specified time period. The same logic is applicable to put option where you have the right but not the obligation to sell shares. The direction where you expect the stock to move, would be a fair reflection of the options trading that you plan to incorporate.
Experts are of the view that options trading is like an insurance policy. You are not going to purchase a car insurance in the hope that you will crash the car. No matter whatever approach you take crashes are bound to occur. You are going to buy options in the hope that you will not need them.
Prediction of the option strike price
When you are buying an option it is going to be valid if the stock price is known to close the options expiration period. It would mean either above and below the strike price. For a call option it is above the strike and for put options it is below the strike. It is not possible for you to choose any strike price, An option quote which would be maintaining an option chain or a matrix are known to be available in a wide range of prices. The increments that takes place between the strike prices are standardized all around the country.
There is a sum that you pay for an option that is known as premium. There are a couple of components associated to it known as intrinsic value or time value. Coming to a time value it means whatever is left.
Understand the option time frame
Every option contract is bound to have an expiration date. It is the last date where you can exercise an option. Once again you can pull out a specific date out of thin air. The choices tends to be limited to the ones that is offered when you are calling up an option chain. A couple of options styles are there European and American that would once again depend upon the type of options you are planning to exercise.
A suggestion is to avail a longer expiration time since it may have a real time value, This is even if the stock trades below a striking price. The moment expiry approaches, the time value of an option tends to reduce.
To conclude once you are aware about the strategies and willing to churn in extra time, numerous upsides are there when it comes to options trading.
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