Getting Started in Options Trading

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Contents

How to Trade Options

Melissa Brock
Contributor, Benzinga

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What are Options?

An option is a contract to buy or sell a stock, usually 100 shares of the stock per contract, at a pre-negotiated price (also called the “strike price”) and by a certain date (also called the “exercise date”). Read on to learn how to trade options.

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Elements in Options Trades

You must decide, in an options trade, the following:

  • Which direction is the stock going to move?
  • How high or low will the stock price move from its current price?
  • How will the stock move during a particular time frame?

Types of Options Trades

There are two types of options you can buy or sell: call option and a put option.

Call option

This option allows the buyer to buy the contract at the specified price on or before the expiry date and is exercised by the buyer when the market goes above the strike price. Within the call option, there are two possibilities:

  • Buy call: The buyer will buy the contract as it would yield maximum profits and limited loss, which is equivalent to the premium paid to the seller initially.
  • Sell call: It is the obligation of the seller to sell when the buyer exercises his/her call option.

Put option

The buyer can sell the contract at the specified price when the market price moves below the strike price. Within the put option, there are a couple of possibilities:

  • Buy put: The buyer has the right to sell the contract when he/she thinks the prices will fall. He/she can sell the contract at his/her own will.
  • Sell put: The seller has the obligation to buy the contract. The seller enters in such a contract anticipating earnings.
Options

Understand the Risks of Options Trading

Options can be purchased speculatively or as a hedge against losses. Speculative purchases allow for the potential to make a lot of money, but only if traders can correctly predict the magnitude, timing and direction of the underlying securities’ price movement. Doing this incorrectly can result in large losses and high trade commissions. Novice traders, beware.

Options Trading Terminology

If you’re a new options trader, you’ll quickly realize there are lots of new, potentially bewildering terms. These terms also include some already covered (it’s important to review!):

  • Holder: A trader who has bought an option.
  • Writer: A trader who has sold an option.
  • Strike price: The price at which the asset will be bought or sold.
  • Expiration date: The already-agreed upon date by which the option owner must exercise his right to buy or sell the underlying security. After this date, the option expires.
  • In the money: The market price of the asset is higher than the strike price (in the case of a call) or lower than the strike price (in the case of a put).
  • Out of the money: The market price of the asset is lower than the strike price (in the case of a call) or higher than the strike (in the case of a put).

Choose a Broker

Low commissions are just the tip of the iceberg when it comes to choosing the best broker for options. Traders need to consider hidden fees, such as platform fees and data fees. Different traders have different skill levels, trading strategies and needs.

Options trading can be complicated, and beginners need to make sure to find a platform with plenty of educational resources and guidance. Advanced traders need to look for professional-grade features and research. Check out some of our favorite online stock brokers below.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Best Binary Options Broker!
    Perfect For Beginners!
    Free Trading Education!
    Free Demo Account!
    Sign-up Bonus:

  • Binomo
    Binomo

    Good Choice For Experienced Traders!

eOption
Commissions
Account Min
Commissions
Account Min
1 Minute Review

eOption is a stock, fund and option trading platform that focuses on low-cost options trading. Its options trading is very affordable at just $0.10 per contract and $1.99 per transaction. The broker also offers a comprehensive options trading course that’s free and educational for both novice investors and advanced traders alike. eOption’s platform is less usable than its competitors, especially for new traders.

Futures and forex trades aren’t currently available, daily market updates are full of jargon and the platform includes very few intuitive features and explainers. Customer service options are also lackluster, and mutual fund transactions are expensive. While eOption might be a great choice for options traders, we recommend other platforms for beginner traders primarily interested in stock and ETF investing.

Best For
  • Options traders looking for low-cost options contracts
  • Beginner and advanced traders looking for options education
  • Advanced traders who don’t need a lot of platform guidance
  • Unbeatable options contracts pricing
  • Mobile app that mirrors capabilities of desktop app
  • Free and comprehensive options education
  • Confusing platform has limited assistance tools
  • Expensive mutual funds and bond trading
  • Limited stock and general investing education
  • Lackluster customer service options
eTrade
Commissions
Account Min
Commissions
Account Min
1 Minute Review

E*TRADE is an online discount trading house that offers brokerage and banking services to individuals and businesses. One of the first brokers to embrace online trading, E*TRADE not only survived both the dot-com bubble and Recession — it thrived. You can choose from two different platforms (one basic, one advanced). E*TRADE is a suitable broker for traders of most skill levels, whether you want to buy mutual funds and hold them for decades or dabble in options swing trading. E*TRADE offers a library of research and education materials to help you out.

Best For
  • Active traders
  • Derivatives traders
  • Retirement savers
  • Sophisticated trading platforms
  • Wide range of tradable assets
  • Exceptional customer service
  • Limited currency trading
  • Higher margin rates than competitors
  • No paper trading on its standard platform
TD Ameritrade
Commissions
Account Min
Commissions
Account Min
1 Minute Review

This publicly listed discount broker, which is in existence for over four decades, is service-intensive, offering intuitive and powerful investment tools. Especially, with equity investing, a flat fee is charged, with the firm claiming that it charges no trade minimum, no data fees, and no platform fees. Though it is pricier than many other discount brokers, what tilts the scales in its favor is its well-rounded service offerings and the quality and value it offers its clients.

Best For
  • Novice investors
  • Retirement savers
  • Day traders
  • World-class trading platforms
  • Detailed research reports and Education Center
  • Assets ranging from stocks and ETFs to derivatives like futures and options
  • Thinkorswim can be overwhelming to inexperienced traders
  • Derivatives trading more costly than some competitors
  • Expensive margin rates
TradeStation
Commissions
Account Min
Commissions
Account Min
1 Minute Review

TradeStation is for advanced traders who need a comprehensive platform. The brokerage offers an impressive range of investable assets as frequent and professional traders appreciate its wide range of analysis tools. TradeStation’s app is also equally effective, offering full platform capabilities.

Best For
  • Advanced traders
  • Options and futures traders
  • Active stock traders
  • Comprehensive trading platform and professional-grade tools
  • Wide range of tradable securities
  • Fully-operational mobile app
  • Confusing pricing structure to leave new traders with a weak understanding of what they pay
  • Cluttered layout to make navigating TradeStation’s platform more difficult than it should be
Robinhood
Commissions
Account Min
Commissions
Account Min
1 Minute Review

Robinhood is the broker for traders who want a simple, easy-to-understand layout without all the bells and whistles other brokers offer. Though its trading options and account types are limited, even an absolute beginner can quickly master Robinhood’s intuitive and streamlined platform. On the other hand, more advanced traders might be frustrated by Robinhood’s lack of technical analysis tools, a feature that’s now nearly universal across other platforms.

Best For
  • Beginner traders
  • Mobile traders
  • Streamlined, easy-to-understand interface
  • Mobile app with full capabilities
  • Can buy and sell cryptocurrency
  • Almost no trading analysis tools available
  • Only taxable brokerage accounts available
  • No option to open a retirement account
  • No access to mutual funds, forex or futures trading
  • Limited customer service
Firstrade
Commissions
Account Min
Commissions
Account Min
1 Minute Review

Easy-to-use and quick to master, Firstrade offers new and veteran traders alike a simple way to start investing with rock-bottom pricing. Firstrade’s platform is simple and streamlined, and it extends this convenience to its mobile app. The company’s $0 commissions on stocks, ETFs, mutual funds and even options make Firstrade especially appealing for frequent traders. Firstrade also offers margin trading, though rates are a bit more expensive than some competitors. Firstrade also currently doesn’t offer access to futures or forex trading, and some more advanced traders may dislike the broker’s simple platform.

Best For
  • New traders looking for a simple platform layout
  • Native Chinese speakers seeking research and education tools in Chinese
  • Mobile traders who needs a secure and well-designed app
  • Simple platform easy enough for even complete novices
  • Quick Bar tool for easy trading throughout the day
  • Free access to Morningstar trading reports and other news in both English and Chinese
  • Secure mobile app with enhanced security and trading features
  • Simple brokerage platform doesn’t include as many charting tools as competitors
  • No access to futures or forex markets
Interactive Brokers
Commissions
Account Min
Commissions
Account Min
1 Minute Review

Interactive Brokers (IBKR) is a comprehensive trading platform that gives you access to a massive range of securities at affordable prices. With access to over 125 global markets, you can buy assets from all around the world from the comfort of your home or office. Options, futures, forex and fund trading are also available — and most traders won’t pay a commission on any purchase or sale. IBKR is geared primarily toward experienced investors. The platform offers limited assistance and can be a challenge for new users to become acclimated to. The broker’s tiered pricing strategy can also be frustrating for traders who focus on hourly or daily price movements.

Best For
  • Access to foreign markets
  • Comprehensive mobile app that makes trading simple
  • Wide range of available account types and tradable assets
  • Comprehensive, quick desktop platform
  • Mobile app mirrors full capabilities of desktop version
  • Access to massive range of tradable assets
  • Frustrating and confusing tiered pricing
  • Bloated website that makes finding information a challenge

Before choosing the right broker , each trader needs to consider his or her trading style and which features are most important in maximizing profitability. In addition, be sure to avoid scam trading sites and platforms.

Getting approval from your broker

Brokerage houses will have to give you permission to trade options; they set limits based on how much money and experience you have before they’ll allow you to trade.

Paper Trading for Options

Paper trading is an important step for anyone serious about making a profit in the options market. It’s a way for beginning traders to perfect a trading plan before trading with real money.

That said, paper trading cannot be approached lightly! It’s possible for new options traders to not take fake money seriously, so they experiment in ways they might not with real money. Therefore, it’s possible for two things to happen:

  • They win irresponsibly, believe the market is easy, throw in real money and lose it all.
  • They lose irresponsibly, believe the market is a scam, and never try again.

It’s important to treat paper trading as if it’s real money, but some traders argue that paper trading can never replace the emotions you’ll experience when you’re using your own money.

Advanced Trading Options

Once you’re familiar with the ins and outs of limit orders and execution prices, you’ll likely be ready for advanced trading options. In addition, you’ll be experienced enough to know to reevaluate your strategy periodically, learn from your mistakes and also, your successes. There are other, more advanced trading strategies you can look into, including:

  • Straddle options: These provide equal profit potential on either side of an underlying price movement.
  • Strip options: These are a market neutral bearish strategy and it provides double the profit potential on downward price movement compared to equivalent upward price move.
  • The Greeks: Metrics, including delta, gamma, theta and vega, that advanced options traders use. These are only a few advanced terms; there are so many more that encapsulate all there is to the complex world of trading options.

Learn More About Options Trading

More complex than trading stocks, it’s necessary to educate yourself. Take classes, pay attention to forums and blogs, watch tutorial videos and download books on trading.

Track the news and know what’s going on in the world economy, and finally, talk to a real trader and ask him/her for guidance.

Seek a mentor through your brokerage firm for guidance if you’re a beginner options trader. It’ll be instrumental to your success as a trader, as there is lots of misinformation online. Many brokers have thorough education on options education. It’s complicated, so you shouldn’t go it alone. For more information and further education, visit the official website of the Options Clearing Corporation , or OCC.

If you want to take a deeper dive into options trading and strategy, we always recommend reading a great options book or taking a class from the pros – like Market Rebellion’s professional trading courses.

Getting Started with Trading Options

If you are brand new to trading options, this page will help you get started. It won’t cover everything you need to know, but it will give you a basic foundation to moving forward. I’ve also included a few additional links to sample videos and courses that you should review if you are interested in a deeper understanding of options (which I would highly recommend).

I believe one of the first things you need to understand before trading options would be how to get to the next level.

This video will look at the learning path in the process of learning.

Everyone learns at a different pace, and you must recognize the stages that you will go through during your journey. This should help you to move forward and avoid distractions.

What are Options: Calls + Puts?

If you are struggling with the beginning stages of learning options. let me help you with a one-on-one personal and private coaching session. We can breakdown things in a step by step way that works for you and explain things in more detail at your pace. In addition, you can ask as many questions as you like!

Option Strike Prices – What are They & What Do They Mean?

Buying Option Contracts

You can be a buyer of option contracts and in this section we will look at the difference between buying calls and puts

Selling Option Contracts

Beyond just buying option contracts, you can be a seller of option contracts. In this section we will look at what it means to be a seller of a put or call option

Option Tutorial: Basics to Trading Options

Sometimes you need to hear things differently to grasp a concept so in this tutorial we go over trading options and what it is all about in a different way.

We cover some basics of buying a call and buying a put as well as selling a call and selling a put.

I want you to be aware of how all of this works on the risk profile picture so you can better understand the mechanics of the risk that you have when you trade options.

Take a look at the video and if you are interested in learning more about options, check out some of our option trading courses.

What is a covered call strategy and how does it make you money?

One of the most basic ways to make money from options is to own the stock and sell covered calls against it.

This allows you to continuously make money month after month from selling call contracts that are still protected by your stock ownership.

if you’re interested in how the strategy works, watch the video and get a detailed look.

What is the smart and professional way to trade options?

There are many ways to trade options, but unfortunately, many people trade options the wrong way.
Initially, people start trading options by buying single calls or puts. Sadly by trading in this way, it causes them to have continuous losses that spiral out of control.

The reason buying trading single option contracts creates regular losses is that time works against you.

However, there is a better way to trade options! The smarter approach to trading options is to trade option spreads where time works for you instead of against you.

Watch this video to learn more about the real way professionals trade options to get a better understanding and see how you can make time premium work for you instead of against you.

The 8 Best Options Trading Platforms of 2020

From beginner solutions to expert portfolios

We are committed to researching, testing, and recommending the best products. We may receive commissions from purchases made after visiting links within our content. Learn more about our review process.

Options trading is a somewhat high-risk area of the investment world where you can pay for the option to buy or sell a specific security at a set price on a future date. Based on fluctuations in market prices for those securities, the value of options rises and falls until their maturity date.

If you want to trade options, you’ll need an account with a brokerage that supports options. Each platform is unique and has its own pros and cons, so it is best to understand what you want in an options account and platform before you get started. Follow along to learn more about the best options trading platforms and which may be best suited for your options trading needs.

Best Overall: TD Ameritrade

TD Ameritrade takes the top spot in this ranking thanks to a combination of reasonable pricing, excellent beginner resources, and a top-of-the-line trading platform that works well for experts and professional traders. No matter where you are in your options trading journey, TD Ameritrade has something for everyone.

Trades at TD Ameritrade cost $6.95 per trade plus $0.75 cents per contract. There is no account minimum. The site offers a current promotion where you get 60 days of commission-free equity, ETF, and options trades with a deposit of $3,000 or more. You get additional bonuses with larger opening deposits.

Beginners have a wide range of resources that are great for options and other investing and trading strategies. For expert traders, the Think or Swim platform gives you Wall Street quality at a Main Street price.

Best for No Commission: Robinhood

You can’t get cheaper than free. While some professional traders are not happy with how trades are handled and processed at Robinhood, it is an excellent platform for beginners to get started with less risk. With no trading fee, you can buy and sell options without risking anything more than your initial investment.

Robinhood is a web-first platform and it doesn’t offer much when it comes to education and research tools. But if you read a book on options and want to try your hand as a hobbyist, Robinhood can certainly handle your needs.

Robinhood also offers commission-free stock trades, ETFs, a limited number of cryptocurrencies, and a limited number of ADRs (American Depository Receipts — a type of stock listing in the US for a foreign company). Because it is mobile first, it offers great real-time notifications for investments and trades on the platform.

Best for Experts: TradeStation

TradeStation started as a software company for traders, and even though it has grown over time, it has held true to its initial trading principles. If you want professional data and high-speed trade execution on an expert-level platform, TradeStation is a great choice.

TradeStation charges $5 per trade plus $0.50 cents per contract. However, it also offers unbundled and per-contract pricing. Professional and high-volume traders may do better with the flat rate cost of $1 per contract instead of the base + per contract fee most brokerages charge.

While it doesn’t offer as much for beginner traders and new traders, you could host a family office or business portfolio on TradeStation with no problems. In fact, its tools are so good it sells many of them for a fee to professional investors with accounts at other brokers. With an active account at TradeStation, you get those tools for free. Just beware the minimum $2,000 balance or five trades per year to avoid a $95 annual account fee.

Best for New Traders: Charles Schwab

Charles Schwab delivers an all around great experience with excellent customer service. Once you open a new account, trades are $.95 each plus $0.65 cents per contract. First-time clients get 500 commission-free trades for two years when you deposit $100,000 or more in a new account.

Schwab offers above-average research and education offerings. It also gives you a very good platform for trading on desktop, web, and mobile. Even outside of options, it is one of the best overall brokerages for a wide range of investing and trading needs.

With the large library of educational and research content, you can enter the high-speed options trading world with your eyes wide open to the risks and opportunities. That said, the competitive costs and quality trading platforms make it a worthy consideration for even the most experienced traders. Accounts require a $1,000 minimum to access options trading.

Best for Low Costs and No Minimums: Ally Invest

Ally Invest is another low-cost brokerage best known for its cousin Ally Bank. Like the bank, Ally Invest offers an easy-to-understand and low-fee brokerage lineup. Trades are $4.95 each plus $0.65 cents per contract. There is no account minimum. With a current promotion, you can get up to $3,500 bonus cash depending on the size of your deposit.

You can start with a low investment to learn more about Ally without worrying about big minimum balances or fees. But even some more experienced traders will be happy with the low costs and a wide range of services geared toward option traders.

Highlights include a powerful trading platform and valuable charts, data, and analytics to help you build your options trading strategy. In the world of discount brokerages, you can’t always take the value of a broker from its trading fees. At Ally, that’s certainly the case.

Best Per-Trade Fees: Interactive Brokers

If you are an active trader who prefers making frequent, small trades, Interactive Brokers may be the best fit. There is no pre-trade fee and options commissions are $0.70 cents per contract. High volume traders can qualify for lower pricing down to $0.15 cents per contract with 100,000+ contracts per month. This brokerage also offers pricing that is attractive to active stock and ETF traders. Different pricing applies to non-US options.

This brokerage is not good for passive investors with few trades per year or a large balance. The account requires a hefty $100,000 minimum balance or $10 in commissions per month to avoid an activity fee. The activity fee is the difference between your trading commissions and $10 per month to total a $10 minimum monthly charge. The account charges a higher $20 minimum if you don’t keep at least $2,000 in equities in the account.

If you do have the appetite for at least $10 in trades per month and/or can satisfy that $100,000 minimum, Interactive Brokers has excellent trading platforms. These tools include a natural language bot that will place orders based on your instructions and a professional-grade desktop platform.

Best Tiered Pricing: Lightspeed

Lightspeed is a brokerage with a focus on active and experienced traders. Lightspeed charges $0 per trade and $0.60 cents per contract with a $1 minimum per trade. Tiered pricing starts at 500+ contracts per month. Depending on your volume, discounted rates range from $0.20 cents at 100,000+ contracts per month to $0.50 cents at 500 to 2,000 contracts per month.

Lightspeed offers professional-grade trading platforms. The options platform is known as Livevol X and offers integrated order execution, analysis, customized layouts, historical data analytics, and other useful features. Like competing platforms, you can manage most common account needs right in the desktop, web, or mobile-based platform.

This brokerage is not as beginner friendly as others on our list, so you should look elsewhere if you are brand-new to options trading. But if you are experienced and want expert tools, you can find everything to whet your appetite at Lightspeed. With low pricing for high-volume options traders, you might find it the right home for your options brokerage needs.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Best Binary Options Broker!
    Perfect For Beginners!
    Free Trading Education!
    Free Demo Account!
    Sign-up Bonus:

  • Binomo
    Binomo

    Good Choice For Experienced Traders!

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