A stock option is an agreement, but not an obligation, to buy shares of stock at a set price on or before a certain date. A call option gives you the right to buy a certain amount of stock at a set strike price. A put option gives you the right to sell a stock. The option holder has the right to exercise an option, and the party who sold the option must fulfill the terms of the contract.
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Practice some paper trades to find out if you will be any good at options trading. Always calculate and include your commission costs. Your options must make a real move in the right direction to make option trading financially feasible.
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Gain experience day trading stocks before you attempt to day trade options. Day traders often execute multiple trades in one day. When you are dealing in options, you must, on a moment's notice, have enough experience to analyze a stock, make the correct calculations before you buy and then sell at exactly the right time.
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Take an online course in trading stock options. Learn the various strategies veteran option traders use to increase profits and decrease losses. Find out which strategies work best under different market conditions.
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Purchase options software. Use it to track the options market with any trading style you use. Software can also help you keep track of the stocks in your portfolio and monitor their price movement, trends and signals.
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Trade both European- and U.S.-style options to boost your profit potential. European options include OSMI (cash-settled options based upon the SMI stock index of the Swiss Exchange) and ESX (cash-settled options based upon the FTSE100 stock index of Euronext).
Tips & Warnings
Many brokerage firms require that an account be approved for options trading and that you maintain a minimum balance.
Option markets can be traded both up and down. Some option strategists suggest that in certain situations, day traders buy both a call and a put. That way, it doesn't matter which direction a market moves.
You can trade options either long or short. Long trades have unlimited profit potential and limited risk. Short trades have limited profit potential and unlimited risk. If you are a novice at day trading stock options, trading uncovered options short can be very risky.
Aspiring option traders long to trade professionally, but many have jobs and responsibilities that keep them from trading full-time. Fortunately, that's often...
