Options Trading for Beginners: How To Start

The following steps should provide an overview of exactly how you can begin putting your options trading knowledge to use:

1. Learn Requirements & Open an Account

2. Decide The Type of Option

3. Predict Stock Price Movement

4. Determine Expiration Date

1. Learn Requirements & Open an Account

As you learn more about the various types of options trading, try to identify a strategy that appeals to you. Take time to write down your investment goals, such as how much income you want to generate, how much capital you must invest, and how much growth you want to see in your portfolio. Once you have a better picture of your financial goals, start searching for a broker to work with. They will assess your financial readiness and help you open an account.

2. Decide the Type Of Option

Research different stocks to decide which type of option you want to purchase (either a put or call option). Remember, if you expect the stock prices to rise, you will want to purchase a call option. On the other hand, consider purchasing a put option if you expect them to fall. This step is crucial to the success of your overall investment, so be sure to research the assets you are considering carefully.

3. Predict Stock Price Movement

Investors can only profit from options trading if the contracts remain “in the money.” For call options, this means the share value needs to rise above the strike price, while put options need the share value to decrease below the strike price. If you want to be successful when trading options, you will need to learn how to predict future changes in stock prices and act accordingly. This is much easier said than done, but you will be surprised how many predictions you can make with the right research.

4. Determine Expiration Date

The final choice investors must make before purchasing options is determining when they want the contract to expire. If you are confident stocks will increase in value, but are unsure if it will happen before the expiration of your contract you risk losing money. The key to options trading is predicting how the value of stocks will change and within what time frames. The expiration dates of contracts can range from a few days to multiple years, with short-term contracts posing more risks than their long-term counterparts. Keep this in mind as you try to home in on expiration dates that you feel comfortable with.

Practice With Paper Trading

There are certain online portals that will allow you to trade fake money through the platform. This practice, called paper trading, is a great way to get experience before putting real money on the line. As you win and lose money, your fake account balance will fluctuate, and you can learn from your trades. Overall, the experience is meant to mimic the real practice without the same stakes. While the practice is somewhat limited in terms of features, it can still help you dip your toes in the water as you learn more.

Pros And Cons of Options Trading

Options trading requires diligence and strategy, but there are numerous benefits associated with this investment type. Options offer flexibility, profit potential, and liquidity. Seasoned investors will be happy to know that options can even be used to safeguard other investments, depending on the strategy used. Overall, options trading can be a great way to diversify an investment portfolio when done right. Note that there are certain risks associated with options trading, and investors can’t simply dip their toes in the water and expect to be successful. Markets are difficult to predict. Some of the more complex options trading strategies will require a deep level of understanding. To be successful, you will need to learn how markets and investments move. If not, you could expose yourself to significant losses.

Advantages Of Options Trading

There are several benefits of options trading to be aware of as you consider this investment opportunity:

• Options have the potential to yield high returns

• Options give investors time to watch how the market changes

• Options offer the chance not to buy, allowing investors to avoid some risk

• Buying options gives investors control of more shares than purchasing stock outright

Risks Of Options Trading

Investors should note that there are some risks associated with options trading, as with any investment type. Here are a few cons to consider:

• The investment strategies are more complicated than other, more beginner-friendly investments

• Depending on the trade, investors could lose more than their initial investment

• Options can result in losses (or gains) in relatively short periods of time

Summary

Options are one of many investment vehicles you can use to build a successful financial portfolio, but it will require some work on your part. Options trading strategies are often overwhelming and demand a certain level of planning to be profitable. The best advice I have on options trading for beginners is to do the work ahead of time. Learn about the stock market, research brokers in your area, and ask your network for insight. These steps will help you immensely as you begin trading options. When done right, options can be a highly valuable addition to even the most established investment portfolios.