subject: How to Trade Option for Beginners [print this page] How to Trade Option for Beginners How to Trade Option for Beginners
Option is the right to buy or sell an asset on a certain price and date. For instance, you want to buy a computer from a friend, it would cost you $2000. If you do not have the money to buy it right now, you can tell your friend that you can pay $500 right away if your friend will hold the computer for you in a month's time. If you cannot produce $2000 by then, your friend can keep the $500 and can do whatever he wants with the computer.
The computer is the asset and your right to but it under those specific terms is an option. Now, if your friend discovers that the computer is worth $6000, he still has to sell it to you for $2000 because you have that right, and you'll make a profit. If the computer breaks, you probably won't want to use $2000 to buy it, buy you'll lose the $300 you paid to buy the option. Or, you have the choice to sell the option to someone else, maybe a friend who knows how to fix the guitar.
This is a very basic example on how trading option works, although you can profit highly from this investment, it is very complicated and risky in practice. The assets traded are usually stocks. Here are some tips on how to start trading options:
Start by trading stocks. If you constantly earn returns, then you can consider moving to options. If you lose money in stocks, you'll probably lose more with options
Learn semantics. Look up trading options terminology, organize the terms in your computer, print them out and start familiarizing yourself. Example of some basic terms: Holder is someone who buys options.
Writer is someone who sells options
Call is the option or right to buy an asset at a fixed price within a specific period of time
Put is the option or right to sell an asset at a fixed price within a specific period of time
Start reading books. Read books that discuss the basic techniques and strategies for trading options. There are so many books to choose from.
Understand technical analysis. Learning to interpret charts is very important if you want to successfully trade options, regardless if you plan to trade index, equity, currency or any type of option.
Choose which options trading suits you. Decide which options trading go well with your trading philosophy. Swing traders or less experienced option traders usually trades binary options while experienced options traders are usually trading a retail option brokerages account in which they can build their investment strategy.
Open a brokerage account. Your account must be an option trading account and you will require approval by the firm's Option Principal to trade options. If you have no experience trading options, the Option Principal will not approve strategies beyond writing covered calls to begin. As you gain more experience you can ask for permission to engage in advance option trading strategies.
Understand Risks and Characteristics of Standardized Options. You should read and understand this booklet written to meet the requirements of SEC rule. In conformity with the Securities and Exchange Commission rule brokerage firms distribute the booklet to those who open an options trading account.
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