Options Trading for Beginners
2022-04-13 | Simpler Trading Team
One way or another, all traders and investors alike who actively trade in the stock market have heard about options trading. And with the potential that options have, it might leave you wondering how a trader such as yourself can start trading options. But before you blindly jump into the exciting world of options, you need to know and understand the basics. That way, you can give yourself the best shot at success.
For instance, options can get highly complex quickly, and traders who are new to options may find massive losses to their portfolios if they’re not careful. Traders need to know and understand that options have many moving parts and pitfalls that traders need to mind. However, that’s what we’ll be getting into – we want to teach you the basics and go over some of the best ways to trade options.
What Are Options
Options are considered financial contracts directly associated with a company’s securities value. An option is an existing contract created by a seller that will always equal 100 shares of a particular stock. The seller will determine the conditions of the options. If a buyer agrees to the terms of the seller’s contract, they can buy the option at a premium cost.
Once that’s established, the options contract is a time-sensitive binding contract where the seller gives the buyer the right but not the obligation to buy the options contract. Traders new to options need to understand that you’re under NO obligation to act on the contract. You can let the contract expire and walk away. However, keep in mind that the premium paid to the seller is not reimbursable.
Are Options Better than Stocks?
Another Perspective on Options
Let’s say someone wanted to buy an expensive watch for $1000, but the buyer didn’t have the money to buy it at that very moment. However, the buyer knows this watch brand is well known to gain value quickly, and the price won’t be the same next week. The seller understands the buyer’s dilemma and proposes to the buyer that they will hold the watch for 30 days and give the buyer the right but not the obligation to buy the watch for $1000.
But the seller isn’t going to do that for free; the only stipulation was that the buyer would pay the seller a small fee of $50 regardless of the watch’s price. As they round up the money, the buyer agrees that the watch has increased to the cost of $1500, but because the seller promised the buyer, they would hold the watch for 30 days at the price of $1000. The seller has to honor their agreement.
Learning how to trade options?
Options can get complicated for anyone; here at Simpler Trading, we offer the Options Membership. Traders can sign up and be a part of a community that can guide and mentor you through your trades. Join today and gain access to the options trading room, get important trade alerts, and get the help you need in the market. Why trade alone when you can trade with us? Only at Simpler trading.
Types of Options
There are many types of options a trader can choose. So when you’re new to options, it can get overwhelming very quickly. A deep understanding of all the options a trader can choose from will enhance your chances of success in options trading. However, before you can gain a deep understanding, you’ll need to know the foundation of options.
The Foundation of Options
Long Call Option:
This is when a trader buys a call option contract. A trader will have a bullish sentiment in the market. And they’ll want the stock to increase in value above the strike price for the options contract to be profitable. The trader is not obligated to buy the shares if they don’t choose to.
Short Call Option:
This is when a seller’s selling call options. The seller will have a bearish sentiment and create the contract hoping the stock will decline. The seller will input the premium, the strike price, and the expiration date—the seller’s obligated to sell their shares if the buyer executes their contract.
Long Put Option:
A trader buying a put option contract will have a bearish sentiment in the market but incurs the right to sell shares. The trader will want the stock to go down for the option to be profitable. The buyer is not obligated to sell their position if they don’t choose to.
Short Put Option:
A seller selling put options creates the contract and inputs the premium, the strike price, and expiration date. A seller will have a bullish sentiment and generate an option contract hoping the stock will go up—the seller’s obligated to sell their position if the buyer executes their agreement.
These are just the basics of options trading. Please note: that traders need to be aware of the tremendous risk associated with selling options. There isn’t too much upside, and the downside is great. Selling options are for very experienced traders with many years of experience and a lot of capital. If you intend to sell options, be mindful of the risk and the money required when selling options. Below, you’ll find popular advanced ways to trade options.
Advanced Options Trading
When a trader has gone long on a stock and feels that the stock has gone into a bearish market, in this case, they’ll essentially buy put options for the number of stock shares that they possess. For instance, every put option contract equals 100 shares of stock. If the trader has 1,000 shares of that same stock, they’ll buy ten contracts to cover their position. It acts as an insurance policy if the stock goes down. This strategy is popular among investors who wish to protect their assets if the markets turn bearish or if the investor feels that the company will miss its projected earnings.
This strategy occurs when a trader purchases 100 shares of regular stock of a company and then simultaneously sells a call option for those same shares. When a trader sells a call option, they give the buyer the right to buy the shares. If the buyer exercises that right the seller has to sell their shares. However, it’s a covered position because the seller owns the 100 shares; the deal is the seller has to sell them to the buyer. However, it’s an excellent strategy to reap premium income as a seller if you have the shares to cover it.
Bear Put Spread:
This strategy is also known as a Debit Put Spread. It consists of a trader buying a put option with a higher premium and then simultaneously selling the put option at a lower price. This strategy helps traders buy put options that have a higher strike price. For instance, the trader selling the put option at a lower strike price will have the difference debited from the higher put option.
Bull Call Spread:
A Bull call spread is also known as a Debit Call Spread, And this is the opposite of a Bear Put Spread. For instance, a trader will buy call options at their preferred strike price while selling the same number of calls at a higher strike price. Generally speaking, the trader should have the same expiration date of the same stock.
The Best Indicators to Use for Options
In any trading, indicators can be a beneficial tool to help you understand the market and make trading decisions. However, it’s even more critical with options trading. To make good decisions, you’ll need a tool that can let you know what you’re looking at to make a clear, sound decision. Below, you will find the best indicators traders can use while trading options.
Best Free Indicators
Moving averages is a fundamental indicator that professionals use daily. They help pinpoint entry and exit points, bullish and bearish trends and help traders recognize support and resistance levels.
Relative Strength Index (RSI):
The RSI is a technical momentum indicator that measures the recent price changes that can then be used to help the trader identify oversold and overbought stocks. This can help the trader determine if the market will turn bullish or bearish. In options trading, traders can decide to either buy a call or put an option when they get the information needed from the indicator.
Volatility is an important event in the stock market that needs to be measured accurately. Bollinger Bands does just that; it lets traders quickly see the stock trend and if it’s in the oversold or overbought territory. For instance, three lines indicate this, called the Bollinger Bands. If the trend line reaches the top of the band that tells the trader that the stock’s overbought, it’s signaling being oversold if the trend line moves closer to the bottom band.
Best Premium Indicators
Trend Oscillator Pro:
If you’re looking for an indicator that can instantly identify a chart’s trend, then the Trend Oscillator Pro will be an indicator that you’d be interested in. There isn’t any guesswork when using this indicator; it will show you if the stock is bearish or bullish so that way you can make the best decisions in trading. The best part of this indicator is that it can be used with the HiLo Pro Oscillator as a supplementary indicator to give you the best, most up-to-date information on the stock charts.
The Voodoo Lines® Indicator:
This indicator helps uncover what most charts don’t show you; it offers traders hidden support and resistance levels. It also helps predict future prices for stocks in the market. It’ll also indicate precise entry and exit points that go perfectly with options. The Voodoo Lines Indicator goes perfectly with options where traders can buy call and put options using this indicator.
The Squeeze Pro Indicator:
The Squeeze Pro Indicator is one of the most popular indicators on the market, and the reason is that this indicator adapts to market conditions and volatility. It identifies precise entry and exits; it catches rallies telling you when to buy and sell.
How to Be a Better Trader
Options are a popular trading method because of all of the variations it offers for all types of traders. But, options can get complex fast, and the best way to learn and be an options trader is to trade options.
But why do it alone? When you can trade with professional traders that will guide and mentor you every step of the way. Here at Simpler Trading, we offer that service. Join us today as a Simpler Options Member, get immediate access to the live trading chatroom, get real-time trade alerts, and get the help you need to be a better trader.
FAQs on Trading Options
Q: Can a beginner trade options?
A: Options can be good for beginners because you have no obligation to do anything if you’re not happy with the direction your contract is moving. Additionally, options allow for a more conservative approach, and smaller capital requirements.
Q: Can I start options trading with $500?
A: Yes, you can start trading options with $500. To trade options you need a brokerage account. Most brokerages don’t have account minimums.
Q: What to consider before buying options?
A: Before you buy options, make sure you understand how they work, have a brokerage account, make a trading plan. You can also consider paper trading as a practice.
Q: What is difference between European and American option?
A: Traders can only exercise a European style option at its expiration date while American options can be exercised at any point before the expiration date.
Q: Which is better American option or European option?
A: There is no one answer to that and you should keep in mind the differences between the two types of options related to their settlement prices, differences in exercising them and risk vs expense ratio.