How to Trade Options – Options Trading Basics

Options Trading BasicsAll 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