How to Start Trading Options

How to Start Trading Options

It is not very difficult to start trading options. There are three basic steps:

  • Sign up with a broker
  • Get options quotes
  • Start trading
  • In order to trade options, you must first, of course, sign up with a broker. The most practical brokers for beginners are online. Online brokers are cheap, easy to use, and for many of them you don't need to maintain a minimum balance. One that I recommend is I started with a different broker, but I had to fax in paperwork to start options trading, which was annoying. With I didn't have to fax anything in, and the whole sign-up process didn't take more than 15 minutes. You can also easily fund your account with an online bank transfer. The cost to trade options at is only $4.50 + $0.50 per contract. That compares to $6.95 + $0.50 at my previous broker. That's the main reason I switched. I have been really satisfied with, and that's why I'm recommending them (plus I get credit if you use my link :) ).

    Secondly, you will need to do some research to get a feel for how much options cost. Your online broker will have quotes available. You can also get quotes directly from the source at Chicago Board Options Exchange. They are the largest options clearinghouse. You can see options quotes on the screen and also download text files with information. I've spent a lot of time staring at the quotes on CBOE's pages!

    Finally, once you have a funded account with permission to trade options and a knowledge of how options are priced, you can begin trading. When you trade, you will usually have a few options that may be kind of confusing at first, but are actually very simple. They are:

    • Buy to Open - This means that you buy a call or a put option.
    • Sell to Close - This means that you sell the call or put that you bought -- that is, you close your option out.
    • Sell to Open - This means that you sell a call or a put option without owning it beforehand.
    • Buy to Close - Use this to close out the call or put option that you sold.
    You will also be asked whether you want to use a market price, limit price, etc. when buying or selling an option -- just like when you buy or sell stock.

    One warning I will give is that you are very careful with options. To be safe, start buy simply buying calls and/or puts. Or you can do a covered call. I DO NOT recommend that you start by selling a naked call or put -- your losses could be very large. Also, keep in mind that to get the same return with an option, you can spend much less money. While you may usually put a few thousand dollars on a stock, you can put a fraction of that towards options to get the same return. Don't spend on options what you would normally spend on stocks! At least not at the beginning. Options can go to 0 much easier than stocks can. If you would usually spend $1000 on stocks, you may only want to spend $50 to $100 on an option.

    There are many tools available to options traders, including many tools and tutorials online, and Black-Scholes pricing calculators. Use them to your advantage.

    Good luck and happy options trading!

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