How to Get Started In Options Trading?

An American option is a contract that gives you the right to buy or sell and asset or position at a specific price before the expiration date. In options trading, you have the right, not the obligation to buy and sell assets.

Options trading is divided into put and call options. With the call option, you have the right to purchase an asset at a specific price before the given date. You want an increase in prices so that you can buy an option. 

Short Put

A put option is opposite to the call option. In this type of trading, you are purchasing the right to sell an asset. You want the prices to go down to make a profit. However, options trading is not as simple as it looks. It is complex and risky trading. So, if you want to trade in this high-risk trading, first of all, educate yourself then invest in options trading. So, in this article, you will find out how to get started in trading options? 

Steps to Get Started In Options Trading

Follow the below-given steps to get started in options trading. 

Step 1: Understand What The Options Are?

Options trading is different than stock trading. So, first of all, understand the basics of options trading. 

  • What Are The Options?
  • An option is a contract that gives you the right to buy or sell and asset or position at a specific price (strike price) before the expiration date. The strike price can be lower or higher than the market price. You can trade options in US exchange, or you can purchase or sell to a foreign broker. Options control the greater value of the stock, so it involves lots of risks as well. 

  • Risks Of Options Trading
  • You never want to put your money in any trade without risk assessment. You can purchase options as a hedge against losses or speculatively. Speculative purchases allow traders to make massive profits if they can understand the timing, magnitude, and direction of the underlying security’s price movement. For novice traders, trading options is risky. You can use options as a strategy to protect your investment. 

  • Read The Booklet “Characteristics and Risks of Standardized Options.”
  • This book was written according to SEC regulations. When you open an options trading account, you will get this booklet from brokerage firms. In this booklet, you will find all the information about tax considerations, risks, types of options that you can trade, settling, and exercising options. So, it is essential to read and understand this booklet to be successful in options trading. In this booklet, you will find out how to get started in options trading. So, it is a very informative booklet. 

  • Understand Basic Types Of Trades
  • In options trading, there are two basic types of options, such as calls and puts. So, you must know how you can purchase the right to buy and sell. How you can sell and buy the asset to make profits. Make sure that you know the expiry date; otherwise, your option might expire worthlessly. 

    You should understand some basic terminologies, such as holder, writer, strike price, expiration date, in the money, and out of the money. Start studying these terms to be successful in options trading. 

    Step 2: Preparation for Trading Options 

    Once you are familiar with all the options trading terminologies, now it’s time to prepare yourself for options trading. 

  • Open A Brokerage Account
  • So, if you want to trade options, you need to open your brokerage account. After account opening, you can make transactions. You can do this online or traditionally. Do some researches before opening a brokerage account. 

    • Compare commissions that different trading companies offer. Some companies don’t offer commissions. 
    • Do some online research to find reviews of people about brokerage companies. 
    • Be aware of scam trading sites. Never invest in a company with a bad reputation.
    • When you enter into the online trading system, look for safe payment options. 

    In this way, you can protect your investment. 

  • Get Approval To Trade Options
  • Before buying and selling options, you need to get permission from the brokerage house. Brokerage firms set a limit on accounts based on the investment in the account and experience. For customer satisfaction, each firm has different requirements. 

  • Understand Technical Analysis
  • Options are short-term investments, so for making significant returns, you will be closely looking at price movements. So, if you want to predict the price movements accurately, then you will have to learn technical analysis. In technical analysis, you should learn about:

    • Support and resistance levels
    • Importance of volume
    • Understand chart patterns
    • Learn about moving average

    It is important to learn fundamental and technical analysis to become successful in options trading. 

    Step 3: Getting Started With Trading Options

    You never want to lose money in trading. So follow the below-given practices to gain profits. 

  • Start By Paper Trading
  • You will never want to put all your money into such a trade that you have recently learned. Use a practice trading software and paper before making entry to real trading. Do this for a couple of months before entering into real trading. The best way to trade options is only to invest such amount of money that you can afford to lose. 

  • Reevaluate Your Strategy Periodically
  • Look for the options that you can do to improve your investment. Learn from your past mistakes and follow your successful strategies. Keep your strategy focused and periodically evaluates it to get good results. 

    Step 4: Move On To Advanced Trading Options

    Join online forums where you will be connected to like-minded traders. You will get valuable information there. Explore other options trading strategies. You can try strip and straddle, but before moving to these strategies, makes sure that you are expert in basic options trading. Finally, learn about the Greeks. For more complex trading, understand and learn Delta, Theta, Gamma, and Vega. 

    By following all the steps, you will be able to know how to get started in options trading?

    Sky Hoon. Read Full Bio
    Website Owner, Twitter-er
    He has been trading since 2008. He started this blog to share the journey about option trading. He dabbled in stocks, bitcoin, ethereum (in Celsius Network), ETF (lazy Dollar Cost Averaging) and also built websites for fun. He used this as a platform to share my experiences and mistakes in trading, especially options which I just picked up.