As a beginner to options trading, you may find the whole process a bit complicated. Like stock trading, options come with a risk that can lead to a large payout if you play your odds right. Read on to learn all about the basics of options trading so you can try it out for yourself.
What Options Are
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Options are contracts that give holders the right to buy or sell stocks at a set price by a specific expiration date. They are a part of a larger group of derivatives in that their price is linked to the price of something else. Similar to ETFs, mutual funds, bonds, and stocks, options are a type of asset class.
Call options are when you have the right to buy a stock at a set price on or before an expiration date. If you anticipate that a stock will rise, investing in a call option at a low price is a smart financial decision. This way, you are getting a high-priced stock for less money than it is worth.
Pull options are when you have the right to sell a stock at a set price on or before an expiration date. They are beneficial when you expect the price of a stock to fall. This way, you can sell a stock for more money than it’s worth and enjoy the payout.
Important Terms and Concepts
When starting to trade options, you need to know the following terms and concepts:
- Strike price: The set price of an options contract.
- The Greeks: Measurements named after Greek letters that tell you the risk of an options contract.
- Delta: The measurement of the impact of an underlying asset’s change in price.
- Gamma: The measurement of Delta’s change of rate.
- Theta: The measurement of change in time remaining.
- Vega: The measurement of the impact of change in volatility.
- Short-term option: An options contract with an expiration date that is less than a year from your start date.
- Long-term option: An options contract with an expiration date that is greater than a year from your start date.
How to Start Options Trading
Follow these steps to begin options trading:
- Open an options trading account. When reaching out to brokers to work with, they will ask you many questions about your finances to assess what kind of investor you are. After determining this, they’ll assign you to an initial trading level.
- Consult with your broker. It’s their job to offer you guidance and support as you make financial decisions. They can research specific options and provide you with resources to help you make smart investments.
- Determine the direction of the stock. Whether you buy or sell a stock should be based on its direction. Look into options based on how high or low a stock will go as well as the time frame of your buying or selling decision.
This beginner’s guide just skims the surface of options trading. Continue to expand your knowledge of options trading to make smarter investments.