Trading options in the stock market has been drawing traders’ attention as they are low-risk investments. However, the concept can be complex for some. Let us break it down for you.
Options give you the right (not obligation) to buy or sell stocks with an expiring date. You won’t need to be physically present there to purchase these options. You will need a device & an internet connection, & you’re good to go. Options are of two types. One is the call option, & the other is the put option. However, you won’t need to sell or buy these stocks if you don’t exercise your right to buy or sell. You may get confused about what this exercise means.
Don’t worry as we will discuss briefly regarding opening an option share account & how to trade options.
1. Predict The Stock’s Movement
Options let you do two things. Either buy or sell. You won’t have to do the buying or selling unless you want to. That’s the best part of options because they give you the right to buy or sell, not any obligation.
However, you need to pay an upfront cost to hold such a right, known as the premium. If you want to buy stocks that are valued higher than the initial price at the initial fee, pick a call option.
Again, if you want to sell stocks that are valued lower than the initial price at the initial fee, pick a put option. Just as simple as that.
The only skill you will need here is to determine where the stocks will go after a specific time. Here your broker can help, or you can choose to be a part of Chuck Hughes Inner Circle Trading that provides you the latest trade information and gives you insights on when to trade and use options accurately.
2. Prerequisites For Opening An Options Account
You may be familiar with the brokerage account to trade stocks. But opening an options account is a bit different. You need to know the basics of how options work. Option stocks allow you to decide for yourself whether you want to sell or buy a stock.
Unlike the brokerage account, you are not bound to purchase the stocks. You have the right to buy. So, given the situation, if you feel you should buy, you can buy it. But if you don’t want to buy it, then you won’t have to till the maturity date.
Before investing your money and trading options, you need to find a broker who will initially assign you to a trading level (range from 1 to 4) based on your knowledge. Other factors are-
- Your financial information
- Income source
- Type of options you want to buy
- Your experience in this sector
3. Choosing The Perfect Broker
Your broker will screen you before choosing. So it is natural for you to do the same. He will be the frontman of your trading business. Understandably, he should have more knowledge regarding this field than you.
But if he’s a rookie just like you, you may find yourself in an unsettling position shortly. To select the perfect broker for your options trading, look for the below-mentioned qualities in the broker-
- Vast experience
- Enough tools & resources available
- A decent history of the previous trading
Your broker is the most important man for you in this options trading. Try to find a wise, helpful one.
4. Ups & Downs of The Prices
If you buy a call option, you bet that the price will go up within a certain period. This period is counted as weekly, monthly, or even quarterly. The longer the period, the more the risk and the higher the profits.
Premium means the right to buy the stocks at the strike price within a certain period. You then exercise your right to buy if you choose to do so. However, you need to pay a fixed amount as the premium charge. That’s the only real money you are investing in.
Suppose a stock’s strike price is $100, & you are holding the right to buy 100 shares of that stock. If the price goes up by $20, you can buy all those 100 shares at $10,000, although the actual market price is $12,000. Now, that’s your profit. But if the price goes down by $10, you will only have to pay the premium, not the entire $100.
The same applies to put options. Put options mean you hold the right to sell. Here, you are confident that the prices of the stocks will go down. Suppose you have the premium, & as a result, you can buy the shares at the strike price.
Now initially, the value was $100 per share, & you have the premium. In the future, the value goes down to $80. You won’t have to sell that share at $80; instead, you can sell it at $100 per share. You may think, why don’t I buy the stocks in the first place because the profits are not much.
What if the values drop by $20? You will have to sell those shares at $80 & accept the loss plus the premium cost. But if the scene turns adversely, holding the right will allow you to pay the premium cost only.
This is why it is very important to be able to predict the price movement. This knowledge comes extremely handy when you start short selling.
5. Be Wary Of The Timeframe
The factor that determines whether the stocks’ value will go up or down is time. You can’t hold up the stocks at your own will for eternity because these stocks have a specific time such as weekly, quarterly, monthly, yearly, and a maturity date.
If you choose a longer timeframe, you will need to pay more for the premium or the right to buy stocks. Longer time barrier option stocks are more volatile than the short-termed ones. While holding a call/put option stock, don’t think keeping the shares till the last date is the best choice.
The stock market is highly volatile, & prices fluctuate a lot. So, sell or buy whenever you feel right. Don’t mind the last date and be decisive about whether to use a call or put option to ensure maximum profit.