Posted by forex at 5:43 AM
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1. Find a reputable brokerage firm offering on line options trading that has a real time streaming web site available. Investigate the cost per trade or purchase compared to other firms, along with what customer service is available. Another point is to be sure that they will start you up with a minimal account balance if you are working with a smaller amount of funds. All funds must be cleared before your account will become active. Cost for trades are automatically deducted from your running account balance at the time of trade.
2. Learn their web site and how it works inside and out before trading. You don't want to be ready to buy or sell and then get stuck wasting time because you don't know how to navigate or place an order correctly. Once an order is placed, you 'must' live with it..
3. Paper trade at first , which is no more than 'pretending' that you have purchased options, and make your mistakes here without losing any of your money. Just keep record of all your fictitious trades and see how well you fared and learn from that.
4. Investigate companies you may wish to purchase options for. Study their trends, highs and lows for the past 52 weeks along with current position which is called the 'strike price' and consider the likely hood of future movement, up or down. Know as much as possible about the company and what to expect from it.
5. Stock options are sold in the form of a contract. One contract equals 100 stock options which are called either Calls or Puts. When you buy Call options you are betting that the stock will go up. A Put option means that you feel the stock will go down. An easy way to remember the difference is by thinking, 'you call up' or 'put down.'
6. Learn the terminology and principals before actually investing. Options will be listed on the web site and an example would be: (One Coke March 65 Call) which means this is an option to buy 100 shares of Coke stock at $65.00 per share until the end of the business day on the 3rd Friday of the next March. This doesn't mean that you will have to buy the stock yourself, but that it will be available to you or whomever holds that option for that price of $65.00 per share until the expiration. For instance, if the cost of Coke stock is $75.00 per share in March, your options will be worth more depending on whatever the open market will pay for those options to buy Coke at $65.00 per share rather than $75.00. The price you get will vary depending on how much time is left until expiration of the option as well. Put options hold the opposite principal of a Call option whereas you are betting that the stock will go 'down,' however there is a greater risk with a Put option whereas if the price of the stock should go up, let's say to $75.00, and your options are at $65.00 you are responsible for difference between the $75.00 and $65.00. If, on the other hand, the stock cost falls to $50.00 per share, the seller of the Put options pays you to buy the stock at $50.00 so you can make a profit for your $65.00 Put options.
7. Always keep in mind that options that are purchased with an expiration date further out will cost substantially more than those with a nearby expiration since you have less time available for stock movement, which makes them less valuable. For instance, if there is only one week left before expiration and the stock's history reflects very slow movement, this option may not be a wise investment.
8. Once you decide which options you wish to purchase, you can easily place your order. You will have a couple choices available to you here. You can place a 'market order' which means that the first available seller who is selling at market value will sell you their options at 'whatever' the market price is at that moment ,or you may decide to place an order to buy or sell only when a stock option is at a specific price. It is probably a good idea to get a customer service rep to be on the phone with you when you place your first few orders, just to ensure that you are dong it correctly. They should be 'happy' to help you until you get the hang of it.
9. After you have purchased your options, it is important to watch them very closely. Trading options is not a venture that will just do its own thing for you and make money. Sometimes there is only a small window of opportunity that will bring you a profit. It may be only from 10am to 12am on a specific day when a stock price was driven up high because of a good news announcement by the company, which would be a great time to sell your Call options. It is possible that by the end of the day, the news may have changed and the stock price may have come down again.