How to Trade Stock Options on the Internet
There has been a real explosion in options trading over the Internet in recent years. The advent of Internet stock trading has made trading options more available to the average investor. The cost of trading options has been greatly reduced due to the many discount brokers from which an investor may choose. But trader beware, there are many risks involved with trading options and the investor must study hard before jumping into the options market.
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Instructions
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Open a brokerage account with a reputable online broker. There are several different types of accounts an investor can open in which he can trade options. An account can be opened as a cash account which would be subject to taxes. An investor could also open a traditional or Roth IRA. He could open a student IRA for a child, which is called a Coverdell ESA.
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Learn what options are and how they work. An option is a contract which, when purchased, gives the buyer the right but not the obligation to purchase the underlying asset of the contract, usually shares of stock, or to sell it depending on the type of option purchased. The contract allows the buyer to buy or sell the shares at a set price, called a strike price, within a set amount of time.
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Understand the two types of options that are available to the options trader. These are calls and puts. A call gives the holder of the call contract the right to purchase a stock at a certain price before the contract expires. Usually the holder of a call contract wants the stock to go up before the expiration date of the contract. A put gives the holder of the put contract the right to sell the underlying stock for a particular price before the contract expires; this is similar to "selling short." The investor is betting on the share price of the stock to decline.
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Understand the reasons for trading options. There are two main reasons an investor would trade options. The first is pure speculation. Speculation in the stock market can provide the investor with huge gains but it can also be very risky. The second reason for trading options is hedging. Hedging stocks is like buying insurance on the investment. A hedge could be a short position, a put, bought on a stock that the investor owns long, thereby insuring the long position in case it goes down.
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Research options before investing in them. Learn how to read an options table and learn which stocks may make good candidates for options trading. Options can earn an investor big gains but they can also turn out badly, resulting in big losses.
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