Options trading requires an investor to focus on three key elements: direction of the stock market, an asset’s highest price point, and the time of an asset’s highest price point.
On that note, options trading can come with even more complexities than stock trading. When investing in stocks, one merely decides on the number of shares they want. Then, they wait for the broker to fill their order based on the limit price or current market price.
Binary options trading requires a full background on the venture, including knowledge on opening a trading account. You can learn about binary options with InvestManiacs or with this piece on how to start trading options.
Trading Options in Four Simple Steps
Opening an options trading account might be more complicated than starting a typical investment account. However, there should be nothing to it when you follow these steps:
Step #1: Open a Trading Account
Unlike a basic stock account, opening an options trading account requires more than just surface-level information. You’ll need to actually know what you’re doing before you even attempt to open an account. Also, what you want to do won’t matter if the broker finds you lacking.
That means getting things in place on the capital front, especially since you’ll need larger amounts for this particular account. Also, given the account’s series of moving parts and complexities, brokers tend to subject potential investors to a more extensive background check before permitting them to trade options.
Brokerage providers have a more thorough screening process, including trading experience, financial readiness, and risk knowledge. Make sure to score high on all fronts, as that determines whether or not a prospective broker approves your opening of an account.
Step #2: Choose an Option To Purchase or Sell
A call option contract or refresher grants you the right to purchase stock at a strike price or predetermined price within a particular time frame. That said, you also have the right to opt-out of purchasing the said stock.
On the other hand, a put option follows the same rules but addresses selling shares at a given price point before the contract’s expiry. Like the call option, it also doesn’t place the investor under the obligation to sell their contract.
Depending on your prediction of the asset’s movement, you might want to enter into any of the following options contracts:
- Sell a put option and purchase a call option when the stock price increases.
- Sell a put or call option when the stock price remains the same.
- Sell a call option and purchase a put option when the stock price decreases.
Of course, this just covers the basics. You learn more complex techniques the more you get the hang of things.
Step #3: Predict the Predetermined Price of the Option
An option only holds value if it achieves an “in the money” status upon its expiration. That could be the case whether your prediction falls below or above the strike price. The option you purchase should align with your prediction of the stock price position at a given time.
Remember that choosing any strike price isn’t an option. You’ll get provided option quotes, a range of predetermined prices that are standardized across the industry. Their increments are also standardized and based on the stock price.
A premium, which is the price paid for an option, consists of time and intrinsic value. The latter is the difference between share and strike price, given the stock position falls above the strike. Whatever remains is known as the time value, which impacts the stock’s volatility, interest rates, expiration time, and other elements.
All this leads up to the final consideration for opening an options contract.
Step #4: Find Out the Time Frame of the Option
Among the main focuses of buying an options contract is the expiration time. It indicates the time limit for exercising the option.
The date and time of expiry also don’t come at random. It’s confined to the investor’s choices when they call up the option matrix.
Options come in two styles: European and American. These differ depending on the time the contracts can be exercised.
In an American option, an investor can exercise up to any point up to the date of expiration. Conversely, a holder of a European option can only exercise on the expiry date. The American contract’s edge in flexibility over its European counterpart tends to be the reason for its higher prices.
Expiration periods can be as short as a few minutes and as long as a few years. Shorter expiry options are usually the riskier ones, meant for more experienced traders.
Is Options Trading for You?
Stock trading might appeal to beginners and those interested in long-term investment strategies, but it’s options trading that draws in active traders looking for more flexibility in their venture. If you’re someone who likes to trade over short periods and pays attention to market trends regularly, options trading might just be up your alley.
You may also like: Forex Trading 101: Exemplary Tips to Master the Art of Trading
Image source: Pexels.com