Trading Stock Options for Beginners
Stock option trading can be pretty intimidating. If you don’t know what you’re doing, taking shady advice or gambling on a bad decision could spell disaster. But even beginners can learn the ins and outs of trading stock options and find success. Stock options are good for do it yourself investors who want to make their own decisions without constantly consulting a broker. Here’s some information for beginners who want to trade stock options:
What Exactly Are Stock Options?
If you’re wondering what stock options are, you’re not alone. A stock option is a contract that gives you the opportunity – or option, if you will – to buy or sell a quantity of shares of a particular stock, usually 100. With that option contract, you can buy or sell the shares of stock at a certain price (call a strike price) within a particular time frame, sell the contract to another trader, or let the contract expire without losing or gaining money. Both short term and long term investors can use stock options to their advantage, though it’s usually a better strategy for investing over a longer term.
What Types of Options Are There?
If you’re interested in trading stock options, you need to be familiar with the two types of options that are available for you to take advantage of. Those options are call options and put options. Call options are contracts that give you the right to buy 100 shares of a specific stock at a particular price within a certain span of time. A put option is the type of contract that allows you to share 100 shares of a certain stock at a specific price within a timeframe. The specified time could be as short as a day or as long as months or years, depending on the contract you agree to.
Always Consider the Risk When Trading Stock Options.
Just like with any other types of investing, stock option trading is all about risk. If there were no risk at all to a financial strategy, there would obviously be no reward. If you can take advantage of managing the risks in stock option trading, you can expect plenty of success. There are two types of volatility you need to take under consideration when you’re looking at stock options to trade. Historical volatility takes into account the fluctuations in the market that a particular stock has gone through over the past year. Implied volatility is a strategy based on what the market thinks a stock will do through the duration of the contract for the option.
Stock Options Traders Speak Their Own Language.
You’ve already heard about call options and put options, as well as implied volatility and historical volatility. Those terms are just scratching the surface of the lingo that stock options traders use. It’s almost like a whole different language that you have to learn. You can trade in index options, contracts that don’t involve a particular stock but trade across a particular index like the S&P 500. You can be “in the money” (ITM) if the price of the stock will benefit your option or “out of the money” (OTM) if there’s no benefit to you, and if you’re breaking even, you’re “at the money” (ATM). You have to pick up on this and other jargon if you want to communicate with other traders in an educated manner.
Keep Your Goals in Mind When Trading.
The most important thing to think about when you’re engaging in any kind of investing, including trading stock options, is your goals. If you don’t have clearly defined goals, you should make them before you begin to trade. Do you want to fund your retirement? Are you planning on paying off your house? Do you want enough money to put the kids through college? Are you committing to your investment strategy for the long haul? The way you structure your goals will have a lot do with how you trade stock options, so it’s crucial that you create a plan that you can stick to.