Options Trading Education For New Traders
Options trading is a great way of investing but you have to know just how it is done if you want to be successful.
To start off your options trading education, let us start by defining what options are. It is basically a contract that you take out to buy or sell an asset on or before a certain date.
That may sound complicated so an example may be good right about now:
Imagine that you see a car that you like but you don’t have the money to pay for it in full right now. It has all the bells and whistles plus it is in the perfect color.
You talk to the owner and find out that he is selling it for $20,000.
After doing some quick math, you tell him that you don’t have the money right now but you are willing to put down $2,000 and sign a contract so that you the option to pay him in full in 90 days.
Two things can happen here:
- It is discovered that this car belonged to Jon Voight (Any Seinfeld fans here?) some years ago. Naturally, it is suddenly worth a lot more, say $50,000
- You test drive the car and find out that it tends to overheat. The price of the car is suddenly much lower.
You had a contract with the car owner to buy it at $20,000.
You exercise that option……the one where you will buy it for $20,000 and just like that, you now have an asset worth $30,000 more than you paid for it.
If the second scenario takes place, you decide to exercise your option to not purchase the car.
You will lose your deposit.
That is precisely what options trading is.
Get Educated About Trading Options
I will be the first to say that I am still getting my own head around trading options as there are quite a few things we need to know to be successful.
Looking online for courses (reputable courses that is) is a crap shoot with some of these courses and seminars running over $5000!
That’s a good amount to fund your account with to get started with options.
I did find an options video course called Trading Pro System Plus and it covers a ton of topics including:
- Trade Selection & Strategy
- The Big Picture – Technical Analysis
- Portfolio Building
- Advanced Techniques and Explosive Wealth Building Strategies
- Extreme Trading (certain type of day trading)
Over 5 hours of video education covering the basics of options trading, calls and puts plus specific trading strategies such as small frequent wins and ratio trading.
The course has been put together by a 26 year veteran trader, and with over 30 hours of video content, plus special pdf reports and spreadsheets, this training is much more than equivalent to a full week of seminar training… but at a fraction of the price plus you have continued access.
One of the topics covered is “Why options are the best trading vehicle for most traders” and to be honest, I agree with that statement.
It’s covered in the course but in regular trading, even with a set stop loss, your risk can be much larger than you anticipate. Options are a different story.
You can not lose more than you paid for the option! That has built in risk management in the process of trading options.
Here are a few more topics that are covered (there is a lot of information and I find this type of info extremely important):
- The key patterns, signals and confirmations that you need to know before each trade
- The most important skill required to make money in the market
- Which options to buy or sell, how and why
- Why 99% of all retail traders lose money
- How to think and trade like a professional
Here is the link to the Options video course. Check it out and see what you think.
Let’s get back to our Options topics………
Common Options Terms
The asset, in the case of options is either a stock or an index, so you put down your investment now hoping that it will rise in value.
Whatever the excess is on the day that you cash in, is your profit.
There are some common options trading terms that you should understand:
- Call – This gives you the right to buy either a stock or an index for a certain price on a certain date. This of course means that you are predicting that the stock or index will have risen in value by that date. In the market, you will find buyers of calls and sellers of calls.
- Put – This gives you the right to sell an asset at a certain time for a certain price. You are obviously hoping that the value of the stock or index will drop by the time the contract expires. In the market, you will find buyers of puts and sellers of puts.
- Strike Price – This is the price at which a stock or index can be bought or sold. This means that to make a profit with a call, the price of the stock should go above this price. To make a profit with a put, the price should go below the strike price.
- Expiration Date – This is the date when the contract expires to buy or sell an option. It is important to note that as a buyer, you have the right to let the expiration date go by; this however means that you lose 100% of your investment.
- Contract – This represents 100 shares of a company stock. It has a fixed strike price and expiration, and it is what you invest in.
- Premium – This is the price of the option (the $2,000 in our example with the car). It is not easy to understand how premiums are derived but they take onto account factors like stock price, strike price, contract duration and so on. National exchanges such as the Chicago Board Options Exchange are the ones who determine the worth of a premium.
If you are starting out in Options trading, take your time and learn all the ins and outs of trading Options. Some call Options that best kept secret in trading.
Once again, here is the link to the Options trading course.