Before you being your options trading journey, you are advised to do a few things. You would have to acquire as much knowledge as possible to make options trading a successful endeavour. This website contains all that you need for investing and trading success.
However, I urge you to go beyond what is spoken about in most forums and find out what your inclinations towards the subject is. Perhaps, you are an investor who wants cash flow but shuns the risk of a leveraged position. In such a case covered calls are for you. In other instances, there are others who like taking on risk and believe in long only positions that can reap huge rewards. Then the long call option strategy may be for you. In any case, there is something for every one here. From there, you can want to acquaint yourself with strategies suited to your personality. From here, we suggest that you take the next step which is to educate yourself about option strategies.
Be well versed with the option strategies that you intend to use. Ask yourself questions such as do you understand the strategy that you are executing? Do you have a target price to exit the trade?
If you are curious to find out more about how options as an instrument came about, you might want to find out more about the history of options being used. Before standardized contracts came into play, option contracts did were difficult to trade due to its non-standard contract features. You can learn more by reading : History Of Options Trading.
You would also have to learn to perform economic analysis as the general market direction would have an effect on the underlying security. For example, with an impending and expected interest rate hike, markets will fall in general.
Next, you are also expected to do some fundamental analysis on the stocks that you intend to invest in. Are the stocks generally undervalued? Do your stocks have options on them? Fundamental analysis is a very interesting are of study for option prices clearly do not factor in fundamental causes that may cause a stock’s price to rise in the future. For example, Company A is expected to sell a building which is for $100 million. From what you estimate on the balance sheet, the company may book a $40 million profit and the market capitalization is only $40 million. This will happen within a span of 4 months and the annual report will be reported 6 months from now. You may decide to buy an LEAP to capitalize on that. When earnings increase, cash balances increase, you anticipate that the company will give a huge dividend payout. With a huge dividend payout announced, the company’s stock price will rise. Hence, fundamental analysis is also very important. This is something that many traders do not look into and that is a terrible pity in out opinion. Be sure to learn more about this on our site. We have an entire course on fundamental analysis that you may find quite enlightening. Also, you may want to read about the investor that made 471% using options. The link is shown here. Case Study: Using Call Options To Bolster Return. Learn How One Hedge Fund Manager Earned A 471% Return Using Call Options
Options are leveraged instruments and it is very important to understand how to use them. You could earn a lot of money and you can lose a lot of money as well if you are not prudent.
Also, you should read up on some of our resources here on technical analysis. This way, you will have an understanding on the best entry and exit strategies. An option’s price or premium is after all derived from a the price of the underlying security. The behavior of the underlying security affects the price of the option. If you are an options trader who just bought a call option, you would want the price of the underlying security to increase significantly in the shortest amount of time possible. In this way, you will be able to buy the option at a low price and sell the option at a high price. In the derivative markets, the buy low and sell high rule still holds if you want to make a profit. This is the name of the game. In any case, technical analysis will help a trader go a long way. You can also read : Basics Of Price Patterns and Basics Of Chart Patterns.
Also,an option trader should learn about the option greeks. For example, do you know that the price or the premium of an option as affected by the amount of time to expiration and other factors like volatility. Time is critical for an option trader because it erodes the option premium towards expiration. As such, it is helpful to the option writer but a not helpful to an option buyer. Read more in : Overview Of Option Greeks
On this site, there are also a ton of secondary information articles such as how to trade options on illiquid stocks, risk and reward considerations and much more that will help you to become the options trader that you want to be.
Last but not least, you would need to open a trading account to begin trading options. Opening a trading account can be done with as little as $2000 USD. You can use an online broker with automated trading tools to execute your option trades. With regards to the brokers that one uses, there are some that are perhaps more helpful than others. Make sure you do your homework and research before choosing the right broker.