How to Become an Options Trader

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If you can open a stock trading account--either online or with a brick-and-mortar broker--then you should have the option of trading options. However, options trading is not for everyone. Options trading is riskier than stock trading and unless you know what you are doing it is possible to lose (or make) a great deal of money in a very short span of time. One of the things which makes options trading so risky is that options have a limited life. While you can hold a stock for years and years waiting for its value to rise, the same is not true for options. Options expire on the third Friday of the month they are issued for. In other words, January options expire on the third Friday in January, February option on the third Friday in February and so forth. If your option has not performed by its expiration date you could lose all or a portion of the premium you paid. Options are also highly leveraged. That means that a small movement in the underlying stock or index could cause a large movement in the value of the option. This makes options attractive to experienced investors but very risky for beginners.

  • Open a trading account which allows you to trade options.

  • Study the markets. It is essential that you understand the market sufficiently so that you can accurately predict short-term movements in stock and index prices.

  • Learn the language. Every business has its own unique language and options trading is no exception. You purchase a "call" option if you believe the underlying stock is going to trade higher and you buy a "put" option if you feel the underlying stock is about to drop in price. Make certain you understand what a "strike price" is (the price at which you are guaranteed to be able to buy or sell a stock regardless of what the actual market price is) and make sure you understand options expirations (options expire--they cease to trade--at the close of trading on the third Friday of the month for which they are issued).

  • Be prepared for losses. Stocks seldom trade in only one direction. Short-term trades against you can cause large drops in the value of your option. Sometimes, the stock continues to trade against you (causing a genuine loss), and sometimes the stock resumes trading with your position, bringing it back into profit.

  • Have an exit plan. Know when you are going to sell your option before you buy it. You can sell when the option has reached a certain price, or you can sell when the underlying stock or index touches a certain price. Either way, know ahead of time when you are going to sell.

Tips & Warnings

  • Do not play options unless you feel confident that you know with a high degree of certainty which direction the market will trade (at least for the short term).
  • Options trading involves a high degree of risk. Past performance does not guarantee future results. It is possible to lose your entire trading account if the market moves against you--it is even possible to lose more than your entire trading account if you purchase options on margin (with borrowed money).
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