Online Option Trading Tips

Online options trading is inherently risky.

Trading options is inherently risky. Online options trading can be convenient and reduce brokerage fees; however, you must educate yourself on market movements and trading rules. Prices change quickly in the options market. These quick moves can offer great opportunity for the savvy trader, but can mean losses for the uninformed. If you are new to online trading, start slowly and don't invest more than you can afford to lose.

Options

Options are available for various types of assets. You can trade options online for assets such as stocks, bonds, commodities and currencies. Options are the right to buy or sell an underlying asset at a specified price. Unlike the outright ownership of the asset, options have a finite lifetime. Once the option expires, it is worthless. During the option's lifetime, its value rises and falls with the value of its underlying asset.

Firms

Spend some time finding the right online trading brokerage firm for your needs. Ask about timing for execution of your trades and the process for order confirmations. While your trades may seem instantaneous, there is often a short delay due to Internet transmission speed. After-hours trades may not execute until the next trading day. Also, discuss procedures for trades affected by Internet outages or slowdowns. Visit online websites for firms that offer research material and free practice accounts to learn more before you begin trading.

Margin

Buying on margin means your brokerage firm is loaning money for your options purchases. While you can increase your profits by buying on margin, you also increase your risk exposure. If the value of your options declines significantly, you not only lose your initial investment, but you are also liable for the margin loan amount. If you choose to use online margin accounts, verify your understanding of the terms and potential losses.

Fraud

Be suspicious of a firm offering options opportunities that sound too good to be true. Fraudulent operators typically promise high profits and low risk. Before sending money to open an account, check regulatory agencies for the firm's registration status and disciplinary actions. Also determine who to contact if you should have a problem with an online options brokerage. Regulatory agencies exist for various localities and types of options markets. Contacting them quickly will increase your chances of resolving issues.

References

• Oregon Department of Consumer and Business Services, Division of Finance and Corporate Securities, Investor Information Program: The ABC's of Online Investing
• U.S. Commodities Futures Trading Commision: Fraud Awareness and Prevention
• The Motley Fool; Is Options Trading Foolish?; Sham Gad; December; 2007
• The Motley Fool; How to Trade Online; Selena Maranjian; January 2007