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Options trading can be one of the lowest-risk ways to profit from the stock market. But getting started trading options can be challenging. That's why we've created an options trading tutorial that will help traders of any level get started trading.
One of the biggest hurdles new options traders experience is the jargon and "insider" language. Don't let that scare you. Once you see how it is done, most of the important terms and options features will become second nature.
That's why our options trading expert, Tom Gentile, put together this free, comprehensive guide anyone can use to get completely up to speed. We want every trader to have access to the life-changing potential of options.
It covers all the basics and even a few more advanced concepts for when you want to take your learning and trading to the next level. It's Tom's mission - empowering investors to become financially independent.
In Tom's free guide to trading options, you will learn about all the parts of options, from strike prices and expiration dates to time value and option selection for fastest profit growth.
You will also see that options reduce your risk because you need far less capital to start, compared with direct stock investing. And you will learn, step by step, exactly how to place an option trade with your broker.
You can access our complete options trading guide, free for all of our readers, by clicking right here.
But if you prefer the short version, we've got you covered there too.
Here's everything you need to know to start trading options...
Our (Mini) Options Trading Tutorial
Options Can Easily Double - or Triple - Your Money
Options offer an amazing versatility that you can use in a variety of ways to profit from a rise or fall in the underlying market. Call options let you profit from rising stocks, whereas put options let you profit from falling ones - all without risking any more money than you put in at the beginning.
That actually lessens your risk by letting you control hundreds of shares of stock at a much smaller price than owning the same number of shares outright. All you risk is the initial cost of the options contracts.
But the profit potential is massive. Since options contracts give you the right to own or sell hundreds of shares of a stock at a time, even a small move in that stock's share price could multiply your money.
And in times of high market volatility, options are a welcome relief from the uncertainties of traditional investing methods.
Options Have Never Been Easier to Trade
There are full service, no service, and partial service choices. Tom provides a long list from which you can choose. He then tells you about setting up and funding that account so you will be ready to trade.
But it's as easy as ever today.
When people first started trading options, they mainly had to rely on newspapers and brokers to find, place, and track their trades. Nowadays, you can search for and place your trades online.
And you can track your trades in a matter of seconds.
The best part is these new platforms (and many legacy brokerages too) offer commission-free options trading. That makes finding and executing profitable trades even easier when you don't have to fork over a percentage to your brokerage every time.
Find out which of these platforms is right for you right here.
How to Use Options
Options give you the right, but not the obligation, to buy or sell a stock at a specific price. That means you can exercise your right by following through on the contract, sell the contract for a profit before the expiration date, or let the option expire.
Options are described as being in the money, at the money, or out of the money. That describes the relationship between the option's strike price - the price at which you can exercise your option - and the current trading price of the underlying stock. For call options, which give you the right to buy a stock at a certain price (the strike), if the strike is below the stock price, that is consider to be "in the money." If you were to exercise that option right now, you would buy the stock at below market price.
When the strike is above the stock price, that is "out of the money." That means your option won't have any value if you exercise the contract. Who wants to pay more for a stock? And when it is the same as the stock price, that is "at the money."
But just because your option is currently out the of the money or even at the money doesn't mean they don't have value. For example, if you buy an option that starts out of the money but moves closer to being in the money, its value will likely rise. That means you can make money on your option even if you wouldn't want to exercise it.
But there's another important factor to timing...
Using Time to Your Advantage
While option prices naturally decline over time because they will eventually expire, a process called "time decay," you can make this work for you by selling options.
Selling, or writing, options means you start your trade with cash in your account. If the options expire worthless, then you keep the cash. But the risk is the option can be executed, meaning you're on the hook for buying or selling the stock at a loss.
However, there's another way to do this. If you already own the stock, then you can lower your risk. Take "covered calls" for example. In this trade, you sell calls on stock you already own. You get to collect the premium at the start of the trade. And if the trade goes against you, then your risk is that you have to sell your shares at a below market price. That's not a bad tradeoff for the opportunity to keep pocketing money over and over.
It works another way too. How about making money from selling options where the risk is you get to buy a stock on your wish list for a discount?
If that sounds appealing to you, find out more right here...
Option Do's and Don'ts
Tom will give you a complete rundown of options do's and don'ts. But his advice comes back to a few central points: Have a vision, trade only liquid options, manage your risk, don't get greedy or careless, have a plan and stick with it, practice, and be persistent.
As with any new endeavor, it will take a little time and effort to get comfortable trading options, but the beauty here is that you can start small - really small. We encourage you to click through to get Tom's free guide and spend some time with it. When you make your first successful trade, you will be glad you did.