Essential Options Trading Guide

Options for, Options Trading Strategies: A Guide for Beginners

Essential Options Trading Guide

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The distinction between American and European options has nothing to do with geography, only with early exercise. Many options on stock indexes are of the European type. Because the right to exercise early has some value, an American option typically carries a higher premium than an otherwise identical European option. This is because the early exercise feature is desirable and commands a premium.

Our opinions are our own. Options can provide flexibility for investors at every level and help them manage risk. To see if options trading has a place in your portfolio, read through the basics of what options are, why investors use them and how to start trading.

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What are options? An option is a contract to buy or sell a stock, usually shares of options for stock per contract, at a pre-negotiated price and by a certain date. Just as you can buy a stock because you think the price will go up or short a stock when you think its price is going to drop, an option allows you to bet on which direction you think the price of a stock will go.

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Sell the contract to another investor. Let the option contract expire and walk away without further financial obligation. But options are useful for long-term buy-and-hold investors, too. Learn the differences between options and stocks Why trade options? Investors use options for different options for, but the main advantages are: Buying an option requires a smaller initial outlay than buying the stock. An option buys an investor time to see how things play out.

An option protects investors from downside risk by locking in the price without the obligation to buy. You also can limit your exposure to risk on stock positions you already options for. If the share price does indeed tank, the option limits your losses, and the gains from selling options for offset some of the financial hurt.

That education can come in many forms, including: Online options trading courses. One-on-one guidance online or by phone. Face-to-face meetings with a larger broker that has branches across the country. Even better, if a broker offers a simulated version of its options trading platform, test-drive the process with a paper trading account before putting any real money on the line. Consider what kind of contact you prefer. Live online chat? Phone support? Does the broker have a dedicated trading desk on call?

Market Updates & Reports

What hours is it staffed? Options for about representatives who can answer questions about your account? Even before you apply for an account, reach out and ask some questions to see if the answers and response time are satisfactory. Make sure the trading platform is easy to use Options trading platforms come in all shapes and sizes.

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They can be web- or software-based, desktop or online only, have separate platforms for basic and advanced trading, offer full or partial mobile functionality, or some combination of the above. Some things to consider: Is the platform design user-friendly or do you have to hunt and peck to find what you need?

Option buyers are charged an amount called a "premium" by the sellers for such a right. In contrast, option sellers option writers assume greater risk than the option buyers, which is why they demand this premium. Options are divided into "call" and "put" options. There are some advantages to trading options.

How easy is it to place a trade? Can the platform do the things you need, like creating alerts based on specific criteria or letting you fill out a trade ticket in advance to submit later? How reliable is the website, and how speedily are orders executed? This is a high priority if your strategy involves quickly entering and exiting positions.

Does the broker charge a monthly or annual platform fee? If so, options for there ways to get the fee waived, such as keeping a minimum account options for or conducting a certain number of trades during a specific period? Some of the basics to look for: A frequently updated quotes feed. Basic charting to help pick your entry and exit points.

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Screening tools. Those venturing into more advanced trading strategies may need deeper analytical and trade modeling tools, such as customizable screeners; the ability to build, test, track and back-test trading strategies; and real-time market data from multiple providers. Check to see if the fancy stuff costs extra. For example, many brokers provide free delayed quotes, lagging 20 minutes behind market data, but charge a fee for a real-time feed. Similarly, some pro-level tools may be available only to customers who meet monthly or quarterly trading activity or account balance minimums.

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But because commissions provide a convenient side-by-side comparison, they often are the first things people look at when picking an options broker. A few things to know about how much brokers charge to trade options: The two components of an options-trading commission are the base rate — essentially the same thing as the trading commission that investors pay when they buy a stock — and the per-contract fee.

Daily Trade Ideas

Some brokers bundle the trading commission and the per-contract fee into a single flat fee. Some options for also offer discounted commissions or contract fees based on trading frequency, volume or average account balance.

  • Option | Definition of Option by Merriam-Webster
  • Options for the Rest of Us | Welcome to OptionsPlay
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About the author: Chris Davis is a NerdWallet investing writer. He has more than 10 years of agency, freelance, and in-house experience writing for financial institutions and coaching financial writers. Read more On a similar note