Watch our video on options trading tips for beginners to learn how to trade options.
There are many different ways to make money in the market out there. In the webinar above, Tim gives an overview on how to trade options, what he looks for and how he trades them. Make sure to take our advanced options course after taking our basic options course to further your knowledge.
In this options trading tips for beginners post we'll 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. As a result, these videos 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.
It helps you with swing trading or long term options trading. It doesn't take long to grasp and it has very clear signals for new and experienced traders to trade from.
Some popular ways of trading options that we have personally traded are purchasing “naked” call and put options, straddle option strategy, vertical spread options, strangles and iron condors. Confused what these are? Read on.
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 tips.
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. The other side of it is a lender 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."
TIP: Make sure to practice paper trading options.When I first stared trading options I did not paper trade them. I blew 12k on my worst trade, holding short term gold contracts. Please learn from my mistakes and paper trade your options strategies first before doing anything wild!
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. Don't just guess the direction of a stock. This is where options can be really risky.
However, following a routine and having a checklist helps alleviate risk. Once you have developed a few strategies that work, just do it over and over. It may be boring but if it makes you money consistently, who cares 🙂
Call and Put Tip: Especially when you are a newer trader, don't buy straight calls or puts (naked calls or puts) without at least 45 days till expiration and try to buy the options as close to "at the money" as possible so that you capture the move of the stock and can sell them for profit.
Purchasing stock options contracts essentially means that you're entering into an agreement to purchase a stock at a specific price by a certain expiration date. You may have no intention of holding until the option expires, you may just want to trade the contracts for profit. That is what I do a lot on our live streams.
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, $1900 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 $1900, which as of today is trading at over $1740. You're expecting the price to rise and make a profit while you hold the contracts.
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 allow you to make money in any market. It doesn't matter if the stock is going down in price, you can still put green in your account.
If you choose the wrong the direction and don't give yourself enough time till expiration, then your option will expire worthless if you hold it all the way till it is only .01. 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. Learn how to swing trade options.
OPTION TRADING TIP: Don't hold onto options that are decaying or using value too quickly. I cut bait when my option trade is down 10-20%. I also take profit around 30-50%, though some days when I am day trading them, I take profit around 80-100% ROI.
If you need more options training then make sure that you go through our entire beginners 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 sitting in your account, 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. I have been assigned shares before and its no big deal as long as you sell the shares (if that is your plan) before the stock price begins to drop.
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! Therefore, plan your strategies ahead of time. If you need more help learning the basics of stocks then check out our how to start investing in stocks post.
Trading options is easier when you have a good scanner. In fact, 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.
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 one of our favorite options screeners. 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.
We also like BlackBox Stocks Options scanner. They look for very specific options data and have a niche that you simply must check out if you're into options. They follow the options flow and what the big money are doing in the market. OPTION TRADING TIP: Filter your blackbox scanner to only show the stock you are looking to trade, like of $AAPL below. That way you can see in real time when huge option contract sweeps are being traded and and what level of support or resistance it is happening at!
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 video on an options straddle we traded on $NVDA
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. An example would be buying an $MU 49 call selling an $MU 55 call where both options expire on Dec 20th 2019.
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. Register to take our free stock market courses. Thanks for reading our Options Trading Tips post!