Trading stock options attracts a lot of investors interested in fast-moving results. While the options market has gotten a reputation as a high-risk and volatile marketplace, it is also important to note that this type of investing also offers both an income generation opportunity and a protective way to hedge losses in a declining market. Many investors choose option investments since they can get involved for a fraction of the cost of buying the actual stocks. This allows investors a way to leverage stocks for big gains in many cases.
A stock option is defined as an agreement that gives an investor the right to buy or sell shares at a specific price prior to the expiration date. This type of contract is called an option agreement since the investor purchases the right to buy or sell the stock at the agreed upon terms, but is not obligated to go through with the transaction. One of the advantages of trading stock options is that a savvy buyer can make money in any market. Whether a stock price is going up, down or moving sideways, an astute trader knows how to earn profits when when one is trading options. More here: http://www.incomeforums.com
1. Establish a trading account.
Beginners should select a broker that can connect them with expert guidance. Many novice investors make the mistake of signing up with a discount brokerage to save on fees. Beginner investors should not try to start trading options without some assistance. Do-it-yourself investors just getting started in option trading rarely do well without expert advice and coaching. Firms such as E-Trade and Schwab have a good industry reputation and can offer the expert help new investors require.
Depending on the amount an investor has to commit to a new account for trading, there are different types of accounts available. To open a basic options account, there is typically a minimum of about $2000 required for opening the account to begin trading. Although this account makes it possible to trade options, there are restrictions about how often trading is allowed. This type of account allows members to only trade 3 days a week. Many traders open up three of these accounts to give them more flexibility.
The preferred type of account recommended for options trading is a day-trading account. A $25,000 investment is required to open this type of account. For serious traders, this investment is well worth it since they can trade as often as they deem necessary without restrictions.
2. Sign up for a streaming program with real-time updates.
Having information about stock prices at your fingertips is critical for success. While many full-service brokers provide these numbers, there is often some lag time that can prove detrimental during time-sensitive trading periods. Since critical trading information can change abruptly, it is crucial to have up-to-the-minute updates. A reputable research company to consider is QUODD. They are price reasonably and considered reputable by industry standards.
3. Educate yourself about trading strategies.
There are many educational courses and websites with helpful information about stock option strategies. New investors are strongly cautioned against jumping into trading without a thorough and comprehensive education about the intricacies of this risky marketplace. Finding a mentor is highly recommended.
Ongoing education is critical for any committed investor. Connecting with trustworthy research sources is crucial for success. Disciplined investors value research and trade analysis strategies so they can take a calculated risk instead of a careless leap of faith.
4. Practice paper trading before committing cash.
A time-tested way many investors begin trading is to paper trade. This allows beginners to become comfortable with the mechanics of the market before risking losses. In addition to gaining confidence about how to trade, paper trading also allows new traders the chance to test out different strategies. Patience is a virtue in trading. Paper trading tests a new trader’s technical abilities and emotional stability in the exciting world of trading.
Trading stock options is risky for investors that do not do their homework or respect the market. Even under the best conditions, the stock option market is stressful and has ruined many investors. Adequate education and good research cuts the risk substantially, opening up the possibility for trading success.