Options Trading For Beginners - Getting Started
No matter what you do in life there is always a first day. Walking as a baby, driving a car or starting a new job all fall into this category. This is true of beginner’s options trading in the stock market as well. Even if you have experience trading stocks you might not know the difference between a call and a put; don’t get worried because this isn’t going to lead to a pop quiz. What is going to happen is that we will look at options trading for beginners and give you some of the basics to get you started. If you have never been exposed to options trading, welcome to your first day!
What Are Stock Options?
Let’s start our beginner’s options trading discussion with the topic of what options aren’t. Stock options are not ownership in anything; unlike stocks, the holder of an option doesn’t possess part ownership in a company; this is simply an agreement between two investors that one party agrees to deliver something to another party within a specific time period and for a specific price. This eliminates the ownership part of the agreement as well as the idea that you must possess a particular stock in order to implement a position. Interested in selling short an option? In the stock market you have to borrow the stock to do it; in options trading beginners only need to understand that there is no ownership and no problem making the transaction.
What Are the Advantages of Stock Options?
Options have a number of nice advantages that the options trading beginner should understand. Among these benefits are:
- Leverage – Options also have the advantage of leverage; your option is purchased with a multiplier of 100 so your fortunes are affected by 100 shares of stock and not only one.
- Limited Risk – This is not true of all options investing, but overall options trading has limited risk. When buying options, your risk is limited to the price of the premium, or the amount you paid for the option. For example, if you buy straddle (the name for a particular option) and the price of the stock is wrong for your position, you can, in essence, allow the option to expire. This offers a great start in options trading for beginners since they can purchase options without the fear of staggering losses.
- No Risk Paper Trading – Thanks to the power of the Internet, paper trading has become a valuable asset for the options trading beginner. You simply register to use the software and follow the directions of the site. You will be able to implement positions and see the effects of your decisions on your “account”. Lose your money? No problem, it was only virtual money but a real experience beginner’s options trading.
What Do You Need To Do To Get Started?
Getting started is never really difficult. Remember, it is your first day. However, there are several things you need to do as a beginner in options trading:
- Start Learning – There is no substitute for education. Read books about options trading, talk with others that trade options and search the Internet for information about options trading. Once you start investing your own money, you will be glad to understand options trading.
- Create a Stock Trading Plan – This is just as important as your education. You need to outline your goals and objectives as well as your strategies in an unemotional manner. This way, when emotion tries to creep into your decision making process, you will have already decided your course of action.
- Select a Broker – This is a personal, but important part of the process. You can implement your own trades but you need someone to actually place the orders. Some full-service brokers offer more services and most Internet brokers offer lower commissions. Even though you’re a beginner in options trading, define what you want from your broker and find someone who meets your needs.
- Use Japanese Candlesticks – This powerful charting system will help not only the beginner in options trading but is valuable to the “expert” as well. Candlesticks will help you to find the trends in the market that most others miss.
Is that enough information for your beginner’s options trading lesson? Remember that this is your first day but everything you do will build off of it.