Investors need brokerage accounts to invest in the stocks that can potentially result in life-changing profits. However, it is important to pick a broker that allows you to have access to different kinds of investments that are important to you. Nowadays, most brokers can meet the simple needs, but you should always be careful to choose brokers that can not only provide you to trade, but offer the services needed to make smart decisions in those areas. One way to up your investing game is to look into the options market. Options are different than just trading stocks, it can come with some real advantages for investors as well and potentially produce great losses or gains. In this article, we’ll discuss what options trading is and how it can benefit you.
What Are Options?
Options is a contract between a buyer and a seller relating to a stock or other investment. The buyer has the right to do whatever the contract specifies within the period of time that is set by the option. If the buyer exercises the option, the seller must follow the instructions set by the option.
Knowing what calls and puts are is important before starting your first trade. According to the experts at Money Morning, “Options trading can be one of the most lucrative ways to play the market, but there’s a bit of a learning curve. Many traders dive in head first once they learn the basics of calls and puts.” For example, a call option on a stock gives the option buyer the right to buy a set number of shares which is typically 100 per contract at a given price at any time before a specified expiration date. The option seller must sell the stock of the option buyer if the buyer exercises the option. The prices of a contract are considered ‘premiums’ so let’s say you’re buying a call on Apple (APPL) which means you’re betting that the underlying stock is going up, the premium increases as the stock price increases and you profit off of it if you decide that it’s smart to just take profits. This means that the buyer of the option has the right to exercise that contract, but is under no obligation to do so. Therefore, option buyers only exercise the option when it is smart to do so. There are several different ways to trade options. Besides call options as described above, put options give the option buyer the right to sell stock at a given strike price, protecting the option buyer from losses in a stock position.
The Benefits of Options Trading.
There are many reasons why options trading can be a great addition to your trading strategy. Here are some:
- Options give you leverage in your investing. An options contract can give you cheaper exposure to a stock than buying shares outright, resulting in both profits and losses if the stock price moves accordingly.
- Options can also lessen the risk in your overall portfolio. You can combine a put option to sell stock at a specific strike price with ownership of the shares themselves. This trade is known as a protective put which gives you the upside if the stock price rises but protects you from a portion of the losses if the stock price falls.
- Options can offer a source of portfolio income. By selling options rather than buying them, you’re the one to receive the payment for the options premium. If the contract goes unexercised, you get to keep that payment.
Choosing the Right Broker.
For those wanting to get started with options you need to find a good broker. It’s great to find a broker that offers low commissions. Some brokers have different commission rates for options than they have for stocks. It is also important to go with a broker that has great customer support. Option traders are more likely to have to talk to a customer service agent in order to get their trades done the way they want. It can be frustrating having a brokers customer service representative not really understand what you’re trying to do with your options trading.
If you’re fairly new to trading, it may be worth to start off with Robinhood options trading and as you gain experience, you can look for other brokers that offer special tools for evaluating if you feel like it is not cutting it.
Before getting into options trading, make sure that you understand what it is before buying a contract. It is important to choose a broker that also allows this so be sure to do your research to make sure that it suits your needs. Think of options trading as gambling, it’s important to understand risk management. Only step into this market with money that you are comfortable losing if things go bad.
