Step-By-Step Guide On How to Trade Options
Step-By-Step Guide On How to Trade Options
If you are new to trading, there is a high chance that you might be intimidated by trade options. With that said, let us break everything down for you so you can make rather informed decisions after you have learned everything about trade options.
The goal is to help you feel confident enough to start trading options on your own.
Table of contents
Trade Options – An Overview
You should know that people generally trade options for several main reasons. For instance, they might want to use less upfront cash and essentially take advantage of market moves. Subsequently, they might also potentially boost returns. Another general reason to choose trade options is to generate income. Also, you might want to revert to options trading to manage risk, which you can do by reducing the potential downside that you might face in an underlying investment.
On the other hand, if you want to take on a little more risk, then trading options can be for you, too, as you can anticipate greater investment returns.
Make Sure to Educate Yourself
If you are inexperienced in trading options, make sure to get educated and learn about how to trade options so that you gain the much-needed insights that will help you make more informed decisions. By learning more about trading options, you will also be in a better position to decide whether trading options are right for you.
Now that you know the most common reasons why you might want to trade options, the next step is to explore what an options contract is about.
Options Contract – The Components
Now, an options contract is an agreement between two parties, mainly a buyer and a seller, which is usually an ETF or a stock. Each one of the options includes a specific price and lasts for a set time period. Usually, it covers one hundred shares. The buyer of options trade pays for the right to buy or sell those shares.
In the trade options world, the piece of an options contract is referred to as the premium. The potential price that the buyer and seller agree on is referred to as the strike price. Subsequently, the buyer and the seller also agree on the expiration date, which is the specific date that states when the contract will expire.
Trade Options Contract – Putting It All Together
After you have understood the components of the options contract, it is time to pull all the components together. Let us say that you have strong feelings about the prospects of a famous beverage company over the coming months. In this case, you can buy an options contract that gives you the legal right to buy or sell one hundred shares of that beverage company’s stock at the price you want at any time before the date you select for that contract to expire.
Now, if the stock hits your desired price and you subsequently decide to sell or buy those shares, then you are exercising your right to do so, which is essentially exercising the option.
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