Trading stock options may be complicated. This may be even truer for stock trading. When you purchase a stock, you determine the number of shares you want, your broker filling the order at the current market price or the limit price you set. Options trading calls for an understanding of higher strategies, and the process for opening an options trading account embraces a few steps more than opening a general investment account.
Opening an options trading account
Prior to you starting trading options, you will have to evidence you know your onions. Relative to opening a brokerage account for stock trading, opening an options trading account calls for larger volumes of capital. Moreover, given the sophisticated methods employed in forecasting several moving parts, brokers must know a bit more about a potential investor prior to giving them a permission slip to begin trading options.
Brokerages closely examine potential options traders to evaluate their trading experience, comprehension of risks, and financial preparedness. Such details are documented in an options trading agreement requesting the prospective broker’s approval.
Be ready to submit:
- Investment objectives – generally, this includes growth, income, capital preservation, speculation;
- Trading experience – the broker will want to have a good idea of your investing awareness, the duration you have been trading stocks/options, the number of trades you make each year, the size of your trades on average;
- Personal financial info – have proof of your net liquid worth ready, as also annual income, total net worth, and employment information;
- Your preferences among options – calls, puts or spreads. Covered or naked. The seller/writer options have the duty to deliver the underlying stock in case the option is exercised. In the event of the writer owning the underlying stock, the options position is covered.
On the basis of your replies, the broker generally signs you an initial trading level based on the level of risk. This denotes your key to placing certain types of options trades.
Screening implies any number of possibilities. The broker you opt to trade options with is your most vital investing partner. Chancing upon the broker that gives the tools, guidance and support you require is of significant meaning for traders who are beginners in options trading.
Options – which to buy, which to sell?
Being a refresher, a call option is an option that gives you the right, but not the duty, to purchase stock at a decided price – the so-called ‘strike price’ – within a particular time period. A put option renders you the right, without the obligation, to sell shares at a stated price prior to contract expiry.
Contingent upon the direction you expect the underlying stock to move decides the option contract types that have to be taken on:
- the stock price is poised to go up? Buy a call option, sell a put option;
- think the stock price will stay stable? Sell a call option, or sell a put option;
- positive the stock price will go down? Buy a put option, Sell a call option.
Predict the option strike price
Once an option is bought, it stays valuable only if the stock price closes the option’s expiration period ‘in the money’. The implication is either above or below the strike price.
It’s above strike for call options, and below the strike, for put options. You will wish to purchase an option with a strike price that is reflective of where you predict the stock will be whilst the opinion lives.
The premium is the price you pay for an option. There are two parts – intrinsic value and time value. Intrinsic value is the difference between the strike and share prices, provided the stock price is above the strike. Time value is whatever remains, stock volatility, time till expiration, interest rates factored in.
Deciding upon the option time frame
Each option contract bears an expiration period that points out the last day you can exercise the option. You cannot just make up a date. Your Choices Are restricted to the ones offered when you call up an option chain.
Expiration dates may range from days to months to years. Daily and weekly options tend to be the riskiest and are the preserve of the most experienced options traders.
Conclusion
If you are looking to carry trades, the maximum holding period ought to be three days. On expiry week this should descend to intraday. It is recommended to calculate the option level employing underlying forecast levels and time. Sidestep stocks in the news. Sidestep event days include monetary policies, forthcoming stock results, and fiscal policies when trading stock options. No more than three trades ought to be open at any given time. Bon voyage!
