Watch our video on how to learn options trading online.
What is the Best Way to Learn Options Trading?
- Here are some of the best ways to learn options trading:
- Take an options course to learn.
- Learn about the basic components such as calls and puts and how they work.
- Determine your type of trading strategy. Long or short?
- Determine whether you are a day trader, swing trader, or long term trader.
- Set your risk management parameters.
- Naked options have highest risk and highest reward.
- Debit spreads help to limit the risk of naked options.
- Credit spreads are safest to trade.
- Practice trading them in a virtual account first.
We are going to talk about "why" people learn options trading online. There isn’t an exact science for the best way to learn options trading. You have to be willing to put in the time and effort required to master this skill. There are a lot of moving parts and option strategies. The video above explains the "why" behind trading options. For more advanced techniques check out our option strategies course.
If you do, you will see the reward. The learning curve is different for everyone - take your time and move at your own pace. Never be in a rush, because your money and time is valuable - just like options! That's why receiving the proper stock market training is so important.
One of the first things you need to know when you learn options trading is what a stock option is. An option gives you (the buyer) the right but not the obligation to buy or sell the stock at a specified price.
If you believe the stock is going to go up, you buy a call. If you believe the stock is going to go down, you buy a put. You find calls and puts in an options chain.
The options chain alone might seem overwhelming but the best way to learn options trading is to take it a little bit at a time. Options are more complicated than stocks but have a great reward. One of the best things when you learn options trading is the ability to trade the high priced stocks.
2. The Basics
One of the basics with options trading is learning what the different prices are when you go to purchase the option. They are the premium, the strike price and there’s an expiration date for the options contract. The premium price is what you will be paying to acquire the option.
The strike price is the underlying price of the stock, This is what you believe the stock price will move to. So for example, if you believe that NFLX stock is going to move down from 292, let's say to 280, you would buy a put option that reflects what you believe.
Perhaps a 285 put. This would be out of the money, but not so far out that it doesn't become "in the money" or ITM that the contract doesn't have "intrinsic value" at some point while you own it.
Finally, the expiration date is pretty self explanatory. This is the date you must exercise the option by. If you don’t exercise the option by it’s expiration, it expires worthless or is executed for you by your broker on your behalf. Take our free trading courses if you need more help.
3. Learn Options Trading With ITM, ATM, OTM
When purchasing an option you can buy in the money, at the money or out of the money. An in the money option means that a call options strike price is below the market price. The put option strike price is above market price.
An in the money option means the strike price is the same as the current stock price. Out of the money (OTM) for a call option means the strike price is above market price. While a put option strike price is below the market price (make sure to learn how to sell options).
If an option is in the money (ITM) when you sell it, that means there’s usually a profit to be had. You must exercise or sell that option before it’s expiration date as you want to take those profits. Otherwise, you'll be assigned that stock at a discount. Remember, each option gives you access to 100 shares. Your broker will do this automatically if you hold the option into its expiration date.
If an option is out of the money, and no time value left, there isn’t any profits. Those typically expire worthless and you’ve paid that premium and lost the value (money).
An at the money (ATM) option may not have an profit but it could still be worth exercising, depending on time value left and the momentum of the stock (up or down). Take our options trading course.
4. Best Way to Learn
Again, when you purchase an options contract on a stock, it is for 100 shares of the stock. So make sure as a beginner you start out with just 1 options contract. Typically when purchasing from the options chain, it automatically brings up 10 options contracts, or another default amount. Make sure you are only buying the amount you want!
That ends up being way more expensive. Options trading strategies are more complicated than stocks so you don’t want to dive into the deep end right off the bat.
You need to find the trend of the stock and it’s support and resistance. Without knowing those important facts, you’ll be going in blind and trust me, that is NOT the best way to learn options trading.
You’ve heard the term “buy low sell high”. Knowing support and resistance is what will help you buy that option call where you know it’ll end in the money. You want that profit! You can buy that dip and sell that rip. Check our stock market basics post to learn more.
As you start out in your journey to learn options trading make sure you know what options are and how to trade them. Get ThinkorSwim and open a paper trading account. That way you can practice, practice, practice! We show our ThinkorSwim charts live each day in our trading service. We have a live day trading room, swing trade room, and futures room.
You’ll get to know what mistakes you make commonly and what you need to improve upon. You'll also learn the best times to buy and sell and the more you do it the more comfortable you become.
That way when you go to trade with real money, you know you found the best way to learn options trading. Take our thinkorswim course to learn how to set up your account.
You can day trade options or you swing trade them. There's so many ways you can use options to help grow your account!