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Here's How to Trade Options in 5 Steps
So you want to know how to trade options? Well get excited - because is easier than you think. Here I have simplified the process into five easy steps. If you simply follow these steps and don't over-complicate the process, then you'll be well on your way to trading options in no time!
==ONE==Understand Basic Option How-To
There's nothing difficult here. Just a bit of memorizing.
* Make sure you know the difference between a call and a put.
* Be sure to understand your rights/obligations as a buyer/seller of each.
TIP: Go to any online stock exchange and download their options booklet (most provide a free information booklet.) Read through the booklet in its entirety - several times! When understanding How to Trade Options, make sure you are completely comfortable with these key concepts:
* If share price increases, call-option price increases.
* If share price drops, put-option price increases.
Also:
* If you buy a call - you are purchasing the right to buy the underlying security at the option strike price. So, you have the right (but not the obligation) to exercise the call (that is you can BUY the underlying security at the option strike price).
* If you sell a call - you are selling the right to buy the underlying security at the option strike price. If the buying 3rd party exercises this right, you will be forced to SELL to them at the option strike price (especially if the market price is higher than the strike).
* If you buy a put - you are purchasing the right to sell the underlying security at the option strike price. So, you have the right (but not the obligation) to exercise the put (that is you can SELL the underlying security at the option's strike price).
* If you sell a put - you are selling the right to sell the underlying security at the option strike price. If the buying 3rd party exercises this right, you will be forced to BUY from them at the option strike price (especially if the market price is lower than the strike).
In the beginning, that's all you need to know. Once you start paper trading (in Step 4) you'll be able to answer you're own questions along the way - either through your own experience or by reading books and other training material.
==TWO==Find a options-strategy to suit you.
There are thousands of strategies you could choose from. It's important you choose something that suits your lifestyle, your personal risk-tolerance, your beginning trading bank, the time you have available, etc. Personally, I like the Australian Stock Exchange - ASX Equity Options. ASX equity options are traded for 6 hours per day, 5 days a week. They also provide some excellent How to Trade Options free resources.
TIP: If you don't live in Australia, you can still trade the Australian options on the ASX. In fact, it may even suit you better than your local stock exchange. Just think, depending on where you live, you might find ASX hours allow you to be an evening trader - a great way to start trading when you're still holding down a 9-5 job!
You'll also want to give some though to whether long-term or short-term trading suits you best. I like to "day trade" options. This means I never hold an option overnight. It means a lot to me to know my money is locked away in the bank overnight. I don't need to be lose sleep about whether my stocks might gap up or down each morning.
When investigating how to trade options, your chosen strategy should provide definite entry and exit points (to remove any doubt) and it must be based on excellent money management.
==THREE==Select your broker.
Today it's very easy to find good quality online brokers. Look for a broker who understand how to trade options, that has good prices and also provides free charting software. It's also nice to know your broker can take orders over the phone (as a safety net if your internet goes down). Browse the link to my how to trade options web site at the base of this article to see the broker I recommend at the moment
==FOUR==Paper trade your strategy.
With your basic knowledge, strategy and broker in place, it's time to get stuck into paper trading (i.e. practice trading with numbers, but not real money). When paper trading a new system, it's very important to execute every single trade as if it were real. I go to the extent of entering my order into my trading software - but I stop before clicking "buy". This gives me a feel for the speed of execution I will need to take my system live. When learning how to trade options, you really do need to make your experience as real as possible.
==FIVE==Go live.
Now it's time for the excitement! Always start small... just a couple of contracts will do. Most times one or two contracts will only break even of maybe bring you a small loss after brokerage, but that doesn't matter. Count it as a small education expense. The idea is to experience entering a real order in your trading platform. Once you have paper-traded for 6-12 weeks and you know your strategy creates profits, then by all means place full sized trades... and watch your bank account grow!
Introduction to Option Trading
So you want to know how to trade options? Well get excited - because is easier than you think. Here I have simplified the process into five easy steps. If you simply follow these steps and don't over-complicate the process, then you'll be well on your way to trading options in no time!
==ONE==Understand Basic Option How-To
There's nothing difficult here. Just a bit of memorizing.
* Make sure you know the difference between a call and a put.
* Be sure to understand your rights/obligations as a buyer/seller of each.
TIP: Go to any online stock exchange and download their options booklet (most provide a free information booklet.) Read through the booklet in its entirety - several times! When understanding How to Trade Options, make sure you are completely comfortable with these key concepts:
* If share price increases, call-option price increases.
* If share price drops, put-option price increases.
Also:
* If you buy a call - you are purchasing the right to buy the underlying security at the option strike price. So, you have the right (but not the obligation) to exercise the call (that is you can BUY the underlying security at the option strike price).
* If you sell a call - you are selling the right to buy the underlying security at the option strike price. If the buying 3rd party exercises this right, you will be forced to SELL to them at the option strike price (especially if the market price is higher than the strike).
* If you buy a put - you are purchasing the right to sell the underlying security at the option strike price. So, you have the right (but not the obligation) to exercise the put (that is you can SELL the underlying security at the option's strike price).
* If you sell a put - you are selling the right to sell the underlying security at the option strike price. If the buying 3rd party exercises this right, you will be forced to BUY from them at the option strike price (especially if the market price is lower than the strike).
In the beginning, that's all you need to know. Once you start paper trading (in Step 4) you'll be able to answer you're own questions along the way - either through your own experience or by reading books and other training material.
==TWO==Find a options-strategy to suit you.
There are thousands of strategies you could choose from. It's important you choose something that suits your lifestyle, your personal risk-tolerance, your beginning trading bank, the time you have available, etc. Personally, I like the Australian Stock Exchange - ASX Equity Options. ASX equity options are traded for 6 hours per day, 5 days a week. They also provide some excellent How to Trade Options free resources.
TIP: If you don't live in Australia, you can still trade the Australian options on the ASX. In fact, it may even suit you better than your local stock exchange. Just think, depending on where you live, you might find ASX hours allow you to be an evening trader - a great way to start trading when you're still holding down a 9-5 job!
You'll also want to give some though to whether long-term or short-term trading suits you best. I like to "day trade" options. This means I never hold an option overnight. It means a lot to me to know my money is locked away in the bank overnight. I don't need to be lose sleep about whether my stocks might gap up or down each morning.
When investigating how to trade options, your chosen strategy should provide definite entry and exit points (to remove any doubt) and it must be based on excellent money management.
==THREE==Select your broker.
Today it's very easy to find good quality online brokers. Look for a broker who understand how to trade options, that has good prices and also provides free charting software. It's also nice to know your broker can take orders over the phone (as a safety net if your internet goes down). Browse the link to my how to trade options web site at the base of this article to see the broker I recommend at the moment
==FOUR==Paper trade your strategy.
With your basic knowledge, strategy and broker in place, it's time to get stuck into paper trading (i.e. practice trading with numbers, but not real money). When paper trading a new system, it's very important to execute every single trade as if it were real. I go to the extent of entering my order into my trading software - but I stop before clicking "buy". This gives me a feel for the speed of execution I will need to take my system live. When learning how to trade options, you really do need to make your experience as real as possible.
==FIVE==Go live.
Now it's time for the excitement! Always start small... just a couple of contracts will do. Most times one or two contracts will only break even of maybe bring you a small loss after brokerage, but that doesn't matter. Count it as a small education expense. The idea is to experience entering a real order in your trading platform. Once you have paper-traded for 6-12 weeks and you know your strategy creates profits, then by all means place full sized trades... and watch your bank account grow!
Introduction to Option Trading
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