How to Trade Options on a Shoestring Budget

Go Long Strength and Short Weakness

Trading options is a measure of risk that most investors should not attempt without a keen understanding of the mathematical construction of option strategies. Option trading can be very rewarding, or result in the complete loss of capital. Option traders need to have a money management technique for allocating monies between trades as well.

Things You'll Need

• spreadsheet

Instructions

1. Maintain a brokerage account at optionxpress.com. Use the website to test any option form including straddles, covered calls, naked put and naked call strategies.

2. Trade a single option (one option represents 100 shares of stock). Each option price is determined by how far away the price is from the price of a stock. A stock at 100 has 'in the money' options at 90, 95, and 97.5 while the 'out of the money options' would price at 102.5, 105,110.
   Call options represent the right to purchase stock at the specified call price, or anytime until the expiration date of the call. Put options represent the right to sell stock at the specified put price until the expiration date.
   Options are decaying financial instruments. They decline in value every day, as they approach expiration. The result is that on expiration day, the value is the intrinsic value or the price difference between the option and its stock price.

3. Diversify your option selection by choosing at least one put option for every call option. This will help offset the effect of market fluctuation. There is a strategy where you buy several far out of the money options. These would trade very cheaply, say 10 to 20 cents each, per share of stock.

4. Write a covered call in your margin account to receive the income the option buyer will pay for the right to buy (or sell) in the future. These trades can be renewed at the end of every option expiration date and provide a steady income stream.

5. Always be prepared to make a market decision instead of stock with a call or put. Trade volatile stocks with low dividends for best result. If you are right in your market call, you can expect to see dollar for dollar increases in the value of the option with the stock price movement. This method is about the best trade-off between covered calls and out of the money options.

Tips & Warnings

• Always have a stop price where you must exit the trade.

• Never use market orders in options. Always use limit orders.

Resources

• Navigation to Option Prices
• Good Brokerage Account for Option Traders