The Basics on Free Option Trading Accounts
The trading of stock options is complicated and includes significant risk to a trader's account balance. No broker offers free option trading with a live account, but it is possible to find demo accounts to practice the buying and selling of option contracts. The brokers usually include online educational materials and free seminars.
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Option Trading
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Options trading is the buying and selling of put and call options on stocks and stock market indexes. Trading strategies often combine different contracts on the same stock to make a profit on the expect future changes in the stock price. Options have a finite life of a few days to several months. The short-term nature of option trading exposes traders to quick losses if their chosen strategies do not work as planned. The different type of option strategies range from simple to very complex.
Using a Demo Accounts
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A free, practice option trading account can allow a novice trader to practice option trading with live market prices but no real money at risk. First, the new trader can learn how to find specific option contracts and enter trades to buy and sell. Next, a free account allows the trader to learn how to initiate multicontract option trading strategies. When the trader understands the mechanics of option trading, a free account lets him develop his own option trading system and fine-tune the system to produce profitable trades.
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Finding Free Practice Option Accounts
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Practice option trading accounts are available from some brokers that specialize in option trading. The Chicago Board Options Exchange -- CBOE -- offers a generic virtual trading account plus practice accounts labeled PaperTRADE and PaperMONEY. These accounts are accessed through the CBOE website and use the software of real online option brokers. An online discount broker may also offer a free demo account through its website. Some brokers require traders to open a live, real money account and give a practice account to use for strategy development.
Costs of Trading Options
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Trading costs for option trading can add up. Typical commissions on an option trade are the broker's usual stock commission of $7 to $10 plus a commission of $1.00 to $1.50 per contract in the trade. A trader entering an option spread with five contracts in each leg will see a commission amount of $17 to $25 to enter and to close out the trade. Option quotes on thinly traded contracts can have bid/ask spreads of $5, $10 or wider. These spreads must also be overcome before a trade is profitable.
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