Option trading basics a guide to getting started
Getting Started with Strategies Strategies Advanced Concepts. Why Add Options To Your Practice? There are so many available options and ways to trade them that you might not know where to begin. Getting started is easier than you think, once you determine your goals.
Before you begin trading options, have a clear idea of what you hope to accomplish. Options can play a variety of roles in different portfolios. Picking a goal narrows the field of appropriate strategies. Perhaps you want more income from the stocks you own.
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Maybe you hope to protect the value of your portfolio from a market downturn. No one objective is better than another, just as no one options strategy is better than another. It depends on your goals. Once you've decided on your objective, examine options strategies that can help reach that goal. For example, if you want more income from the stocks you own, investigate strategies such as writing covered calls.
If you're trying to protect your stocks from a market downturn, you might think about purchasing puts or options on an index that tracks the type of stocks in your portfolio. Once you're ready to invest in options, choose a brokerage firm. Firms may offer helpful advice as well as execute trades.
Some firms work with clients to ensure options trading fits into their individual financial plans. They also advise clients about potential objectives and strategies, and outline the risks and benefits of various transactions.
Alternately, some discount firms don't offer personalized advising services but charge lower commissions. Both inexperienced and veteran investors may consider consulting their brokers before opening or closing out a position. Your brokerage firm evaluates and approves you for a specific level of options trading. Not all investors are allowed to trade every kind of strategy, since some strategies involve substantial risk.
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This policy protects brokerage firms against inexperienced or insufficiently funded investors that may default on margin accounts. It also protects investors from trading beyond their abilities or financial means. Levels of approval and required qualifications vary, but most brokerage firms have four or five levels. In general, the more trading experience and liquid assets you have, the higher your approval level. Firms may also ask you to acknowledge your acceptance of the risks of options trading.
Even if you have a general investment account, there are additional steps required before you can begin trading options. You'll have to fill out an options agreement form, used by brokerage firms to measure your knowledge of options and trading strategies, as well as your general investing experience.
Read the document titled Characteristics and Risks of Standardized Options for basic information about options. Your brokerage firm is required to distribute this document to all potential options investors. This document also contains detailed examples of the risks associated with particular contracts and strategies. You can't purchase options on margin , as you can with stocks.
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However, some brokerage firms require that certain options transactions, such as writing uncovered calls , take place in a margin account. That means if you write a call, you'll have to keep a balance in your account to cover the cost of purchasing the underlying stocks if the option is exercised. If the value of the assets in your margin account drops below the required maintenance level, your brokerage firm will make a margin call, or notify you that you need to add capital in order to meet the minimum requirements.
If you don't take appropriate action, your brokerage firm can liquidate assets in your account without your consent. Since options can change in value over a short period, monitor your account to prevent being caught by a margin call.
This web site discusses exchange-traded options issued by The Options Clearing Corporation. No statement in this web site is to be construed as a recommendation to purchase or sell a security, or to provide investment advice. Options involve risk and are not suitable for all investors.
Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options. Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr.
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Program Overview MyPath Assessment Course Catalog Podcasts Videos on Demand Upcoming Seminars. Options Calculators Collar Calculator Covered Call Calculator Frequently Asked Questions Options Glossary Expiration Calendar Bookstore It's Good to Have Options Video OIC Mobile App Video Series. OIC Advisor Resources Why Add Options To Your Practice? Getting Started with Options. What is an Option? Know What You Want And How to Get It Once you've decided on your objective, examine options strategies that can help reach that goal.
More Than Just a Broker Once you're ready to invest in options, choose a brokerage firm. Doing the Paperwork Even if you have a general investment account, there are additional steps required before you can begin trading options. Watch the Margins You can't purchase options on margin , as you can with stocks.
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