Options trading is a complex undertaking, even more, that stock trading. When one buys a stock, they decide the number of shares they want and a broker fills the order at the current market price or a set price limit. Trading stock options not only needs some of these elements but also much more, including an extensive process of opening a trading account.
If you’re already thinking of how to trade stock options, you must first clear some hurdles before you can even get started. Due to the capital needed as well as the complexity of predicting the fluctuating elements, a broker must know more about potential investors before allowing them to start trading stock options.
Opening a Stock Trading Account
Brokerage firms often screen prospective stock options traders to evaluate their trading experience, their understanding of the risks involved in options as well as their financial preparedness. You must provide your broker with:
• Your investment objectives, including capital preservation, growth, income or speculation
• Trading experience, which includes your knowledge of investing, the period you have been in stock trading, the number of trades per year and size of your trades.
• Your personal information, which can include your liquid net worth, total net worth, employment information and annual income.
• The types of stock options you desire to trade
Based on the answers you give, your broker will assign you an initial trading level which is your key to placing certain stock option trades. The screening process should be two-way. The broker you decide to trade stocks with should be your most important partner. Look for a broker who offers the support, guidance, research, and tools you need to execute successful trades. ‘
What Are the Key Elements In Stock Options Trading
If you’re still unfamiliar with how to trade stock options, the secret is that by taking out an option, you are essentially buying a contract to sell or buy a stock. And for you to place a trade, you need to make three important choices:
1. Choose the direction you anticipate the stock to move
This determines the kind of stock options contract you can take. If you think the stock prices will rise, you will purchase a call option, and if you think the prices will go down, you will purchase a put option which puts you at liberty to sell shared at a specific price before the contract expires.
2. Forecast how low or high the stock prices will go from their current prices
A stock option remains valuable only when the stock prices close the option’s expiration period either below or above the strike price. For a call option, it is above the strike, and for the put option, it is below the strike. You will want to purchase a stock option with a strike price reflecting where you forecast the stock shall be at the option’s lifetime.
3. Determine the period within which the stock will most probably move
All stock options’ contracts have expiration dates that indicate the final day you can execute the option. With options trading, you cannot just think of a date from thin air. All your choices are limited to the dates offered when you call up a trade. Expiration dates could range from days to years. The daily and weekly options are often the riskiest and are meant for experienced option traders. Monthly and yearly expiration dates are preferred for long-term stock traders.