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How to Trade Options in 4 Steps
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Chris Davis November 20, Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page.
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Our opinions are our own. Options can provide flexibility for investors at every level and help them manage risk. To see if options trading has a place in your portfolio, read through the basics of what options are, why investors use them and how to start trading.
What are options? An option is a contract to buy or sell a stock, usually shares of the stock per contract, at a pre-negotiated price and by a certain date. Just as you can buy a stock because you think the price will go up or short a stock when you think its price is going to drop, an option allows you to bet on which direction you think the price of a stock will go.
Sell the contract to another investor. Let the option contract expire and walk away without further financial obligation.
Options Trading 101 – What You Need To Know To Start
But options are useful for long-term buy-and-hold investors, too. Learn the differences between options and stocks Why trade options? Investors use options for different reasons, but the main advantages are: Buying an option requires a smaller initial outlay than buying the stock. An option buys an investor time to see how things play out.
An option protects investors from downside risk by locking in the price without the obligation to buy. You also can limit your exposure to risk on stock positions you already have. If the share price does indeed tank, the option limits your losses, and the gains from selling help offset some of the financial hurt. That education can come in many forms, including: Online options trading courses. One-on-one guidance online or by phone.
Options Trading for Beginners: Strategies for Getting Started
Face-to-face meetings with a larger broker that has branches across the country. Even better, if a broker offers a simulated version of its options trading platform, test-drive the process with a paper trading account before putting any real money on the line.
Consider what kind of contact you prefer. Live online chat?
How to Trade Options in 4 Steps - NerdWallet
Phone support? Does the broker have a dedicated trading desk on call? What hours is it staffed?
What about representatives who can answer questions about your account? Even before you apply for an account, reach out and ask some questions to see if the answers and response time are satisfactory. Make sure the trading platform is easy to use Options trading platforms come in all shapes and sizes. They can be web- or software-based, desktop or online only, have separate platforms for basic and advanced trading, offer full or partial mobile functionality, or some combination of the above.
Some things to consider: Is the platform design user-friendly or do you have to hunt and peck to find what you need?
Best Time(s) of Day, Week, and Month to Trade Stocks
How easy is it to place a trade? Can the platform do the things you need, like creating alerts based on specific criteria or letting you fill out a trade ticket in advance to submit later?
How reliable is the website, and how speedily are orders executed?
This is a high priority if your strategy involves quickly entering and exiting positions. Does the broker charge a monthly or annual platform fee?
If so, are there ways to get the fee waived, such as keeping a minimum account balance or conducting a certain number of trades during a specific period? Some of the basics to look for: A frequently updated quotes feed. Basic charting to help pick your entry and exit points. Screening tools. Those venturing into more advanced trading strategies may need deeper analytical and trade modeling tools, what time period is it better to trade options as customizable screeners; the ability to build, test, track and back-test trading strategies; and real-time market data from multiple providers.