Options trading can be complex, even more so than stock trading. The price you pay for an option has two components: Earnings Trades Discussions This is where we discuss our earnings trades. High-frequency trading could be an issue, Strugger says, when it is based on market data that only investment firms have access to, or access to first. Deep research library and customer education opportunities. Options traders routinely capitalize on volatility swings around events like the release of quarterly earnings reports. Because of the amount of capital required and the complexity of predicting multiple moving parts, brokers need to know a bit more about a potential investor before awarding them a permission slip to start trading options.
Then he uses options trading techniques to pursue large and steady gains with only a fraction of the money that would be risked on regular stock purchases. These professional moves can profit even when stocks move sideways or unexpectedly downward.
1. Be Able to Manage Risk
We adhere to strict standards of editorial integrity. Some of the products we feature are from our partners. Cons Higher trade commission. High short-term ETF trading fee. Robust research and tools. Cons No no-transaction-fee mutual funds. Cons Very basic trading platform Limited data and research.
Cons Inactivity fees High minimum balance requirement Complex pricing Minimal educational resources. Two platforms with no minimum or fees. Cons Higher trade commissions.
Cons High account minimum Trade minimum for active trading platform. We want to hear from you and encourage a lively discussion among our users. Before you can start trading options, a broker will determine which trading level to assign to you.
Based on your answers, the broker assigns you an initial trading level typically 1 to 4, though a fifth level is becoming more common that is your key to placing certain types of options trades. Screening should go both ways. The broker you choose to trade options with is your most important investing partner.
Finding the broker that offers the tools, research, guidance and support you need is especially important for investors who are new to options trading. For more information on the best options brokers, read our detailed roundup to compares costs, minimums and other features.
Or answer a few questions and get a recommendation of which ones are best for you. In order to place the trade, you must make three strategic choices:. This determines what type of options contract you take on. A call option is a contract that gives you the right, but not the obligation, to buy a stock at a predetermined price called the strike price within a certain time period. A put option gives you the right, but not the obligation, to sell shares at a stated price before the contract expires.
If the stock does indeed rise above the strike price, your option is in the money. If the stock drops below the strike price, your option is in the money. Option quotes, technically called option chains, contain a range of available strike prices. The price you pay for an option has two components: The price you pay for an option, called the premium, has two components: Intrinsic value is the difference between the strike price and the share price, if the stock price is above the strike.
Time value is whatever is left, and factors in how volatile the stock is, the time to expiration and interest rates, among other elements. Every options contract has an expiration date that indicates the last day you can exercise the option. Your choices are limited to the ones offered when you call up an option chain. Expiration dates can range from days to months to years. Daily and weekly options tend to be the riskiest and are reserved for seasoned option traders.
For long-term investors, monthly and yearly expiration dates are preferable. Longer expirations give the stock more time to move and time for your investment thesis to play out.
A longer expiration is also useful because the option can retain time value, even if the stock trades below the strike price. Experts say a swift fingered options trader could have executed a trade in nearly a minute, but there was some skepticism in an options trader chat room as to whether that was possible. A much better explanation: The trade was done by a computer. A few years ago, high-frequency trading was relatively rare in options markets.
But today, traders say it is increasingly common. Generally, the theory behind making trading on insider information illegal is that it gives some people an unfair advantage over others. Insider trading is illegal and high-frequency trading is not. High-frequency trading could be an issue, Strugger says, when it is based on market data that only investment firms have access to, or access to first.
2. Be Good With Numbers
Interactive Brokers is a strong option for advanced, frequent traders: The broker offers international trade capabilities, low commissions and a quality trading platform. New traders might be turned off by inactivity fees, high balance requirements and a lack of educational resources. The NASDAQ Options Trading Guide. Equity options today are hailed as one of the most successful financial products to be introduced in modern times. Options traders purchase the right, but not the obligation, to purchase a security at an agreed-upon date.