Extra Income. Build Wealth. Credit Tools. Table of Contents Defining Options, First. Why You Should Use Options. Defining Options, First. What is Options Trading?

Option Trading Made easy | Learn How to Trade Options

Then, you buy or sell your options to increase your profits or lower your risk of loss. Call option - If you have a call option, you have the right to buy shares at the strike price before the expiration date. Having a call option obligates the current owner of those shares to sell them to you according to the option agreement. Put option - Having a put option means you have the right to sell shares at the strike price by the expiration date.

Buying and Selling Options. You pay a premium when buying or selling an options contract. Exercising Options. Options generally require less of a financial commitment than if you bought the asset outright. How to Start Trading Options. Here are three strategies a beginner can use to get started. The Long Call When you hold call options expecting the price to rise, the value of the shares can increase beyond the pre-negotiated strike price.

The Long Put If you predict the rate will fall, buying put options can limit your investment loss. The Short Put The opposite of the long put, the short put is useful if you believe the price will stay the same or rise through the expiration. This way, the option becomes worthless, and the put seller gets to keep the whole premium. As with all investments, there is an inherent risk in options trading.

Robert Farrington. Connect with. The option seller must sell the stock to the option buyer if the buyer exercises the option. The most important aspect of an option is that as its name suggests, the buyer of the option has the right to exercise the contract, but is under no obligation to do so.

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Therefore, the option buyer will only exercise the option when it's smart to do so. There are many different ways to trade options.

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In addition to call options as described above, put options give the option buyer the right to sell stock at a given price, protecting the option buyer from losses in a stock position or profiting from a stock moving down. You can also combine various call and put options to use more sophisticated options strategies that will turn a profit under a variety of situations. You can also choose to become an option writer and sell options instead of simply buying them. Learn more and get started today with a special new member discount.

There are many reasons why options trading can be a great complement to your existing investing strategy. They include the following:.

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Offsetting these benefits are some real risks to options. First and foremost, options often expire worthless, resulting in a total loss of whatever the buyer paid for the option. Second, there's a learning curve involved with options trading. Many brokerage companies offer options trading, but you'll have to meet some added regulatory requirements before your broker will let you actually use options as part of your trading strategy. For instance, you'll have to read some educational material about the options market as well as learn how your broker handles accepting orders for options.

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In addition, you'll need to know what you have to do to tell your broker that you want to exercise an option -- as well as what'll happen if you sell an option and the buyer decides to exercise it against you. Finally, there are some options strategies that only work well when you make multiple trades simultaneously. Because options markets aren't always as liquid as the stock market, those simultaneous trades don't always work perfectly -- and that can introduce the risk that your strategy won't work the way you intended or hoped. If you want to trade options, then finding a top stock broker is crucial.

Here's what to look for:.

OPTIONS TRADING COURSES

Of course, options trading is a far more complex subject than we can explain in a 1,word article, so it's important to spend some time learning about various options strategies and the risks involved before you get started. Options trading takes more effort to do well than stock trading, and options can downright scare some investors. But by understanding the pros and cons involved with trading options, you'll be able to decide whether options are right for you -- and then find a broker that'll help you get the job done.

The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team. The Motley Fool has a Disclosure Policy.



The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters. By submitting your email address, you consent to us sending you money tips along with products and services that we think might interest you. And, given the complexity of predicting multiple moving parts, brokers need to know a bit more about a potential investor before awarding them a permission slip to start trading options.

Brokerage firms screen potential options traders to assess their trading experience, their understanding of the risks and their financial preparedness. These details will be documented in an options trading agreement used to request approval from your prospective broker. Investment objectives. This usually includes income, growth, capital preservation or speculation. Trading experience. Personal financial information.

Have on hand your liquid net worth or investments easily sold for cash , annual income, total net worth and employment information. The types of options you want to trade. For instance, calls, puts or spreads.

And whether they are covered or naked. The seller or writer of options has an obligation to deliver the underlying stock if the option is exercised. If the writer also owns the underlying stock, the option position is covered. If the option position is left unprotected, it's naked.



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Based on your answers, the broker typically assigns you an initial trading level based on the level of risk typically 1 to 5, with 1 being the lowest risk and 5 being the highest. This is your key to placing certain types of options trades. Screening should go both ways. The broker you choose to trade options with is your most important investing partner. Finding the broker that offers the tools, research, guidance and support you need is especially important for investors who are new to options trading.