All investors should know how to trade options and have a portion of their portfolio set aside for option trades. Not only do options provide great opportunities for leveraged plays; they can also help you earn larger profits with a smaller amount of cash outlay. What’s more, option strategies can help you hedge your portfolio and limit potential downside risk.
Of course, many investors, especially new investors, are skittish about options. After all, no investor is required to trade this way, and the transactions can seem complicated. But once you know the pros and cons of this type of investing, it can be a powerful part of your strategy. No investors should be sitting on the sidelines simply because they don’t understand options.
This Guide to Options Trading Basics provides everything you need to quickly learn the basics of how to trade options. So let’s get started.
What are Options?
— Two Basic Types of Options
What are Options Contracts?
— Premium
— At the Money, In the Money, Out of the Money
Price of Options— Strike Price
How to Read Options Symbols — Options Symbols
How to Price Options
— Stock Price
— Time
— Volatility
— Bid/Ask Prices
How to Read Options Quotes
— Open Interest and Volume
— Expiration Cycles
— Expiration Dates
Understanding Options Risk
— Time Isn’t Necessarily On Your Side
— Prices Can Move Very Quickly
— Losses Can Be Subtantial on Naked Short Positions
— Other Common Pitfalls
Common Options Mistakes to Avoid
— The Price Tag Problem
— Fear and Greed
— Allocate Correctly
Options Trading Strategies— Buying Call Options
— Buying Put Options
— Covered Calls
— Cash-Secured Puts
— Credit Spreads
— Debit Spreads
Choosing an Options Broker— Margin – Getting “Approval” to Trade Options
— Options Approval