Options Trading 101 Guide For Beginners

Despite being quite a popular hedging method, options trading for beginners can seem overwhelming at first. But once you understand the basics of options trading, then it can become quite easy; after all, these options are here to protect your portfolio.

Therefore, in our Options trading 101 guide, we’ll teach you how to start options trading with no experience.

How the options works?

Generally, options trading 101 is all about determining the likelihood of future price events. The higher the likelihood of something occurring, the more costly the option to profit from it will be. For example, call values go up as the underlying stocks go up.

On the other hand, the fewer days remaining to the call date, the lower the option’s value. And that is because the likelihood of a price move also reduces as we approach the deadline.

Remember, the time frame is a crucial factor for options. A year-long option’s value is way more expensive than a month-long option.

That’s because the likelihood of the price moving against or in favor of an option increases with time.

How to use simple fundamental and technical analysis strategies?

Most traders have always asked, “between fundamental analysis and technical analysis, which is better when trading options?” The answer is simple; most successful options trading strategies will require you to use both.

The fundamental analysis uses financial and micro-economic data to analyze the price movement. Fundamental analysis helps you determine a stock’s intrinsic value. And if it’s going against your underlying asset, you can purchase/sell an option to protect yourself against a certain occurrence.

But with technical analysis, you can find the price movement within a certain time frame. This will show you the duration of the option you need to purchase/sell. Combining these two analytical methods can guarantee better prediction.

How to Properly Create an Options Trade Plan to Minimize Your Risk

Before trading options, you need to understand the proper definition of leverage. Basically, you can control more shares at a lower price with options than buying the exact shares. Let’s elaborate on this fact in the following option trading example.

If you spend $100,000 on a $500 stock, you’ll have 200 shares. But you can also purchase 2 call option contracts at a lower price and control the same amount of shares. The number of options will be determined by the total shares that would have been purchased.

Let’s say you want to purchase 1,000 shares of a certain firm at $41; you’ll spend $41,000. But instead of going for the stocks, you can get 10 call options at $1,600 per contract and spend $16,000. Going for options will leave you with $25,000.

Control Your Emotions

Generally, most call and put options examples will leave you with cash to spend on other stock. But you must control your emotions. Remember, the price can go against you and end up dropping below your strike price.

Instead of being emotional, you should follow the facts and your technical and fundamental analysis.

How You Can Start Options Trading With No Market Experience

Anyone can open a brokerage account, but for you to open an options trading account, you’ll need to prove that you know what you’re doing. Remember, option trading accounts require huge capital, so they’ll need to know that you know what you’re doing.

After getting an account, you can pick which options to trade. You can use all the necessary indicators to determine the strike price and time frame.

If you know all the options trading requirements, which include the meaning of call and put options, then you will succeed. But when using it as leverage, you should control your emotions.

Learn How to Read the Chart Patterns

Generally, there are several patterns that every trader has to watch out for when analyzing a chart. These patterns can help you determine the market’s trend and when to enter or exit a position. Harmonic patterns can warn you of a short-term effect on the market that can affect your existing trades.

They will show you when to use an option to leverage your position. After all, options trading 101 is more about predicting the future of a trade and then determining the time frame and strike price.

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