How to Learn Put/Call Options Trading

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Options can be a great entry point for new traders -- they are less expensive than trading stocks, and regulated markets offer more security than currencies. They also offer a risk limit: Since an option contract is the right, but not the obligation to trade an asset, the most you can lose is the cost of the option, and that value can be controlled. Like all investments, traders should take the time to become well-versed in options language and trading methods, along with educating themselves about a specific market in order to have the best chance at success.

Begin with the basics: what an option is and how it is traded. The Chicago Board Options Exchange offers free online tutorials through its online learning center at CBOE.com, and this authoritative site is an excellent place to begin your education.

Decide what type of options you want to trade, and educate yourself on the industry. It's simplest if you restrict your trading to one industry or a specific index to begin with, as you'll need to understand the market drivers in order to predict price movements. You can trade options on almost anything, so pick an industry that interests you -- chocolate, for example -- and learn everything you can about it. Make sure you understand what is bought and sold, what influences success, key players and specific companies.

Open a practice account. Nearly all online trading firms offer practice accounts, sometimes called paper trading. Most big online brokerage firms -- like eTrade (etrade.com) or Think or Swim (thinkorswim.com) -- offer options trading. Find a firm you like and try it out. This allows you to get some real-world experience, test theories and watch patterns without risking any capital. It also lets you get familiar with the trading platform itself: You don't want to lose out on an opportunity because you didn't understand the program.

Keep a diary. Record what you traded and why you did so. When you exit the trade (sell the position), note your reasons for this as well -- and what happened overall. Review your diary regularly to see what's working and what's not. Get a feel for what kind of trader you are, when your emotions begin to drive you and where you tend to make mistakes. Incorporate this analysis into your trading plan.

Find two or three reputable sources of information on options trading and on your chosen industry. The Chicago Board Options Exchange (CBOE.com) and the Options Industry Council (optionseducation.org) are great places to learn about trading strategies, while news sources like the Wall Street Journal (wsj.com) provide up-to-date industry and financial analysis. Make a practice of reviewing economic information, trading strategies and industry news on a regular basis.

Tips & Warnings

  • In options trading, knowledge is power. The more you learn, the smarter you'll trade and the more chances you'll have to make money.
  • Options trading does carry some risk, and you can lose your entire investment. Be conservative and never trade with money you can't afford to lose.

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