Options trading education teaches you how to trade options. Learning the different components that make up options allows you to make money in any market.
Options have a reputation for being risky. While this may be true to an extent, they’re also rewarding to trade. Likewise, anything involving the stock market is risky. The goal is to minimize risk.
If you study and learn how to trade options then your risk will diminish.
Options trading education allows you to learn the most effective way to trade options. What is an option? An options contract gives you the right but not the obligation to buy or sell a stock at a set price within a certain time.
The right to buy is the call option. The right to sell is the put option. A great thing about put options is that it’s a way to short if your broker doesn’t have shares to short. Not all brokers allow shorting.
In that case, you could miss out on the ability to profit. If the market is bearish and you can’t short, then you may have to sit out until the direction changes.
With options trading education, you can make money in a down market and not just a bullish one. The stock market is a war between the bulls and the bears. This is how we get our Japanese candlesticks patterns.
To understand options, you need to know the terminology. Stocks and options are different so it stands to reason the terminology for each would be different.
The price that the stock can be purchase or sold as is called a strike price. The strike price is the price a stock must get above for calls or get below for puts before the option can be exercised. You want to make a profit right? So you need to buy a strike you believe a stock will hit.
Now the expiration date is the exact date the contract ends. You aren’t able to hold an options contract forever. Hence the importance of picking the right strike price and expiration date.
There are also in the money, out of the money and at the money options. In the money for put options is when the share price is below the strike price. For call options the stock price is above the strike price.
Out of the money call options means that the price of the stock is below the strike price. For a put its above the strike price. At the money calls and puts means the strike price and stock price are the same.
The price is also known as the premium. The premium is comprised of the stock price as well as strike price, time value and volatility.
Read our post on the implied volatility formula and it’s meaning to learn the importance of it.
Buying and selling calls and puts are apart of options trading education. Owning a call option is taking the long side in the market. Buying a put option takes the short side of things. Now selling a put option (instead of buying) is a long position.
Call and put holders, also known as buyers, aren’t obligated to buy or sell. You have a choice to exercise your right should you choose to do so. This is known as limiting your risk because the most you can lose is the premium of the options contract.
Now being a seller or writer of a call or put means you are obligated to buy or sell. You could have to make good on a promise you made to the trader who bought your call or put. This gives unlimited risk because you can lose more than the premium price.
If this seems confusing, don’t worry, it is. That’s why you need to study and practice before jumping into the deep end of options trading. Read our post on put and call options explained to learn more.
Options trading education isn’t complete without knowing how things like patterns, technical indicators and candlesticks can help you. As you learn more about options it may seem a little scary.
If you know how to find patterns such as head and shoulders patterns or descending triangle patterns you can purchase the correct option. Pick a technique that works for you whether trading weekly options or giving yourself time.
Then see what the technical indicators are saying as well as candlesticks. Candlesticks by themselves also tell a story. Knowing what they mean is going to give you the knowledge of the type of options contracts you should buy.
The most important thing you can do as a trader is to take the time to get stock market training to learn what you need to know to trade.
Options trading education gives you the knowledge of how to trade options. One o the best things you can do is to open a paper trading account and practice. Options trading is a little more risky than trading stocks. If you practice though, you can learn to do it while minimizing the risk.
INTRINSIC VALUE FORMULA – WHAT IS INTRINSIC VALUE AND HOW DOES IT HELP?
WEEKLY CREDIT SPREADS – TRADING CREDIT SPREADS FOR PROFIT
IRON CONDOR OPTIONS
VERTICAL SPREAD – WHAT ARE VERTICAL SPREADS
OPTIONS TRADING – WHAT IS OPTIONS TRADING AND ITS BENEFITS
CANDLESTICK PATTERNS – HOW TO TRADE CANDLESTICK PATTERNS
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