In this options trading strategies for beginners post we will be discussing how to trade options, what options are and how to use some of the popular option trading techniques that are out there. Our goal here is to provide you with access to some simple options trading tutorial videos that will help you learn how to trade options.
If you’re looking for the most successful options strategy, you’ll have to try them out and find which ones work best for you. Ultimately, it’s a matter of your preference and risk tolerance. Yes, options are risky if you don’t have the proper risk management strategies in place. This is the case for any type of trading in the stock market. Every trade has risk and needs to be managed.
HOW TO TRADE OPTIONS – DAY TRADING OPTIONS STRATEGIES
If you want to learn how to day trade options and build a small account, join our room! Dan is now showing weekly (about 3 days a week) live day trading options strategies being implemented. The goal of this exercise is to show you how to build a small account live (from a couple hundred) to 25k.
Dan is currently doing a small account challenge, starting with around $400 and building the brokerage account to around 25k, in a few months time. He will ONLY be using day trading options strategies with high volume, liquid, tight spread, high open interest options that are volatile.
HOW TO TRADE OPTIONS – MANY STRATEGIES TO CHOOSE FROM
Many traders will trade options as a swing trading strategy or a long term options play. If you’re looking for how to trade options using swing trading methods then the Ichimoku Cloud is a great visual technical indicator that will help you with swing trading or long term options trading.
The world of trading options can be very confusing if you’re just getting started. There are a lot of different moving parts and options trading techniques but it’s important to get the overall concept down first before delving into specific options trading strategies.
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OPTIONS TRADING STRATEGIES FOR BEGINNERS – DEFINITION
If you’re not familiar with how to trade options or what an option is then let’s give you a basic understanding. In the traditional world of trading, people buy and sell shares of a stock. That means that they own some number of shares of the particular company.
With options, the concept is a bit different. You don’t own actual shares of the company. It’s more like one is renting the shares from a lender, or the other side of it, a lender is renting out their shares to someone who desires to possibly buy them. If you wanted to buy the stock because your “call option” is reaching a desirable price, that would be called “exercising an option.”
HOW TO TRADE OPTIONS – CALLS VS. PUTS
Here’s the textbook definition of an option:
An option contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the option strike price) during a certain period of time or on a specific date (exercise date).
Buying “Calls” means that you believe that the stock is going to go up. Buying “Puts” means that you believe that the stock is going to go down. Make sure that you do your proper technical analysis and not just guess the direction of a stock because this is where options can be really risky.
*This is an example of a Facebook options chain. Notice the calls on the left side and the puts on the right side. Columns like open interest, volume, implied volatility and expiration date are very important.
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OPTIONS TRADING STRATEGIES FOR BEGINNERS – HOW OPTIONS WORK
Purchasing put and call options contracts essentially means that you’re entering into an agreement to purchase a stock at a specific price by a certain expiration date. This agreement is a lot less than putting out huge capital outlay up front to purchase shares of the actual stock. For a fraction of the price, you can trade $1,000 stocks such as Google, Amazon and Priceline.
Options contract pricing varies depending on whether you go in the money or out of the money. In the money contracts are more expensive than out of the money contracts because you are paying more for the right to buy the stock for less than the stock is trading at today. An example would be to buy January 19th, $900 Amazon calls. This means that on January 19th, which is the expiration date, you would have the right to buy 100 shares of Amazon stock for $900, which as of today is trading at over 1100!
So, essentially there are a couple strategies that traders use to profit when purchasing an option. One is to purchase a contract with the intention of “exercising” it at some point to own actual shares of the company at a specific “strike price” and expiration date. Or, they just buy and then sell the options contract and trade it to someone else before the expiration date (death date for the contract).
OPTIONS TRADING STRATEGIES FOR BEGINNERS – BE CAREFUL OF TIME DECAY!
If you choose the wrong the direction and don’t give yourself enough time till expiration, then your option will expire worthless. Time decay is the time value of your option, also known as Theta. Each day that goes by your option loses more value. The closer you get to the expiration date, the faster the value of the contract decays. That’s why charting your stock and choosing the right options strategy is key. Our Time Value of Option Contracts video will help you to get a better understanding.
If you need more options training then make sure that you take our options trading course. These terms can be very confusing and sound like technical jargon without being put in their entire context together.
If your option expires in the money and you don’t sell your options contract, then your contract will be exercised to purchase the shares at your agreed upon strike price. You’ll soon find 100 shares or more, depending on the number of contracts you bought. You can always sell your shares to the market after they end up in your account, so don’t worry. It’s always best to have a game plan on what you’re going to do ahead of time. Don’t leave anything up to fate!
OPTIONS TRADING STRATEGIES FOR BEGINNERS – OPTIONS SCANNER
It’s important to have a good stock scanner when you are trading options or stocks. During market hours, stocks and options have buy and sell volume, and so having a reliable scanner that will search for your specific options criteria will be fundamental to your success as an options trader.
Trade Ideas is our absolute favorite options screener. They provide a simple to use, pre-configured setting for scanning options and there are various data columns that you can tailor specifically for the options criteria that you’re searching for. See the below image for example of their options scanner setting:
OPTIONS TRADING STRATEGIES FOR BEGINNERS – STRADDLES
What is a Straddle? A straddle is an options strategy in which the investor holds a position in both a call and put with the same strike price and expiration date, paying both premiums. Watch our webinar below on how to trade an options straddle.
OPTIONS TRADING STRATEGIES FOR BEGINNERS – VERTICAL SPREADS
What is a Vertical Spread? It’s an options trading strategy with which a trader makes a simultaneous purchase and sale of two options of the same type that have the same expiration dates but different strike prices. Watch our webinar below on how to trade a vertical spread.
If you’re looking to learn how to trade options then the world of options can be very overwhelming and complicated. Again, it’s important to look at all the different strategies and styles of trading with options. Then, pick an options strategy that fits with your risk management style. Once you become more comfortable and experienced, then you can add more options trading strategies to your bag of tools along the way.
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