Watch our video on options trading strategies for beginners to learn how to trade options.
There are many different options trading strategies to choose from. In the webinar above, Tim gives an overview on how to trade options. Read More
In this options trading strategies 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.
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. It helps you with swing trading or long term options trading.
Some popular options trading strategies are purchasing “naked” call and put options, straddle option strategy, vertical spread options, strangles and iron condor; among many other strategies.
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.
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."
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, options trading strategies helps alleviate risk.
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 allow you to make money in any market.
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 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, 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! Therefore, plan your options trading strategies ahead of time.
Options trading strategies are more useful 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.
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.
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.
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.
OPTIONS BASICS WITH 7 FILTERS I USE TO PICK THE RIGHT OPTIONS TO TRADE
HOW TO SELL PUT OPTIONS AND HOW TO BE WRONG, LAZY AND STILL MAKE MONEY
HOW TO READ TRADING CHARTS WITH SUCCESS
DIAGONAL SPREADS AND LEARNING HOW TO MAKE A DIAGONAL SPREAD
OPTIONS STRANGLES AND LEARNING HOW TO TRADE THE STRANGLE STRATEGY
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