Options trading is an exciting way to invest in the stock market, and if done correctly, it can be profitable. However, it can seem intimidating and complex if you’re new to options trading. In this article, we’ll cover the basics of options trading and provide some tips on how you can get started.
What are the options?
Options are contracts that give the holder the right to buy or sell an underlying asset at a predetermined price and time. The underlying asset could be a stock, index, or commodity. Options come in two types: call options and put options. A call option gives the holder the right to buy the underlying asset, while a put option gives the holder the right to sell.SoFi experts say, “Get important metrics like breakeven percentage, maximum profit/loss, and more with one press of a button.”
Understand the terminology
Before you start trading options, it’s important to understand the terminology. Here are some key terms you should know:
- Strike price: The price at which the option can be exercised.
- Premium: The price paid to purchase the option.
- Expiration date: The date by which the option must be exercised.
- In-the-money: A call option is in-the-money if the underlying asset’s price exceeds the strike price. A put option is in-the-money if the underlying asset’s price is lower than the strike price.
- Out-of-the-money: A call option is out-of-the-money if the underlying asset’s price is lower than the strike price. A put option is out-of-the-money if the underlying asset’s price exceeds the strike price.
Choose a brokerage
To trade options, you must open a brokerage account that allows options trading. Many options are available, so it’s important to research and choose a brokerage that meets your needs. For example, look for a brokerage that offers low fees, a user-friendly trading platform, and a wide range of educational resources.
Learn the strategies
There are many different strategies you can use when trading options. Here are some of the most common:
- Covered call: This strategy involves selling a call option on your stock. If the stock’s price doesn’t rise above the strike price, you keep the premium paid by the call option buyer.
- Protective put: This strategy involves buying a put option on a stock you own. If the stock’s price falls below the strike price, the put option will increase in value, offsetting the losses in the stock’s price.
- Straddle: This strategy involves buying both a call option and a put option on the same stock with the same expiration date and strike price. If the stock’s price moves significantly in either direction, you’ll profit from one of the options.
- Iron condor: This strategy involves selling both a call option and a put option on a stock with different strike prices.
Practice with a demo account
Before you start trading options with real money, practicing with a demo account is a good idea. Many brokerages offer demo accounts that allow you to simulate trades using virtual money. This can help you get comfortable with the trading platform and the strategies you plan to use before you start risking your own money.
Options trading can be a profitable and exciting way to invest in the stock market. It’s important to understand the terminology, choose a reputable brokerage, learn the strategies, practice with a demo account, and start small howitstart.