Trade Options: First Steps for Beginners

Trade options can be a risky investment but what makes it riskier is that you need to get all the facts right, or else you’ll lose your money. To minimize the risk, here are some essential facts about options.

What are the Options?

In simple terms, an option entitles the holder to buy from the contract writer at a predetermined price for a specific period. You can think of buying an option as borrowing money from another party to purchase something in anticipation that its value will rise before the date of repayment. The other party borrows this money from you and agrees on a fee for allowing access to his funds for a given amount of time. This fee is called a premium, and depending on what kind of option you’re buying, the premium can be paid all at once or in installments.

Trade Options for Beginners

There are two basic kinds of Trade options contracts- American and European, depending on the contract’s schedule as far as the expiration date. In America, you can exercise your right any time before it expires, while in Europe, you need to wait till the last day (trading day) before you can exercise it. The difference boils down to what kind of trading opportunities they offer- both for buyers and sellers.

American Options give holders the right to exercise their contracts at any time during their life cycle. In contrast, European ones expect them not to be exercised unless the last trading day (aka expiry). This is what makes American options riskier than European ones.

To be successful in options trading, you need to determine what kind of trader you are- what strategies do you intend to use? There are four kinds of traders- Position Trader, Swing Trader, Day Trader, and Investor.

Position Traders hold their positions for a long period. They place what’s called “uncovered puts,” or what professionals call Naked Puts, an option contract that does not have coverage on the other side or opposite contract. This type of trade options helps them generate income off premiums paid by buyers without incurring losses if their predictions turn out wrong because position traders can buy back their contracts at any time before it expires at a lower price.

Swing Traders tend to focus on short-term trading opportunities. They buy what’s called “covered calls,” or what professionals call Covered Calls that is an option contract with the opposite side being a stock transaction. This type of trade options enables swing traders to generate profits off premiums paid by buyers while limiting losses if their predictions turn out wrong because they can sell back their contracts at any time before the expiration date in which they’ll end up in an even position after selling it back at a higher price than what they bought it for.

Day Traders work on what’s called High-Frequency Trading (HFT). They are individuals who aim to take advantage of what’s called Intraday Market Variations, making use of what’s called sophisticated technology to process things quickly and have the edge over what’s called market makers who make what’s called “pending orders” or what professionals call Limit Orders that is what you place to purchase a security at a specific price. Anyone could benefit from this type of trade options provided they can gain what’s known as “latency comp.”

Also Read Difference Between Demat And Trading Account

The Best Strategy for Beginners: Option Investor

If not familiar with different kinds of trading techniques, the best strategy for beginners would be what brokers usually refer to as option investors, which means using what professionals refer to as covered calls and protective puts. It’s the safest way you could get started without knowing anything about options trading because it limits your loss potential while giving you more opportunities to strategize what you’re going to do next, depending on how things go.

Options trading for beginners

It can also involve using what brokers refer to as Vertical Spreads, a popular options strategy among professional traders where they combine both calls and puts. What they do is buy a put premium while selling a call premium with the same strike price and expiration date to focus on gaining from intrinsic value.

You have just learned the basics of how to trade options. Now it’s time for you to get started with your trades. Remember that this is a long-term game, and there are no shortcuts or overnight successes when trading options. Practice patience and discipline to find success over the years instead of months- Trade options

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