Like other forms of trading, however, it can be overwhelming. Confusion is common, especially among newbies.
If you need help to start on the right foot, read on! This options trading training guide will let you know the basics. Those searching for the best options trading courses should start with this guide!
What Is an Options Contract?
Let’s start this options trading course for beginners by defining options contracts. It’s one of the most important concepts to understand, which will help you trade successfully.
In a nutshell, an options contract refers to an agreement involving two parties to enter a transaction. The transaction has two crucial elements — the underlying security and the preset price.
More so, an options contract is a tradable security wherein the owner has the option but is under no obligation to buy or sell an asset at a previously identified price. Such must be done on or before a set date, which is also when the contract will expire.
Options Contract Specifics
A professional options trading course isn’t complete without discussing the crucial elements. There are specific conditions that must be met, which include those we’ll talk about below.
Every option comes with an expiration date. As the name implies, it’s until when the contract remains valid.
Under American-style options, you can exercise your right to buy and sell anytime before the expiration of the contract. On the other hand, in a European-style option, you can exercise your right only upon expiration.
The strike price in an options contract is a pre-determined value. It’s the price at which the owner can buy or sell the underlying security.
It refers to the asset or security that you must deliver when exercising a contract. You are under no obligation to buy or sell the underlying asset when the contract expires.
Call vs Put Options Basics
Another important aspect of options trading training is to discuss the available types. It will give you a better understanding of how they work.
A call option is a contract that ties to an underlying asset. You’ll pay a premium for the contract. In turn, this will give you the right to buy the asset at the determined strike price. It can be done anytime before the expiration of the options contract.
If the stock price increases, you have the option to implement the contract or sell if you want a profit. On the other hand, if the price does not increase, you can just let the contract expire.
Meanwhile, a put option also ties to an asset, and you also need to pay a premium. However, the main difference is that instead of the right to buy, it gives you the right to sell. You can do this at any point before the options contract expires.
Further, you can sell a put option if you want when the price of the underlying asset goes down. Alternatively, you can just wait for its expiration. You will lose only the premium you’ve earlier paid.
Buying Options vs Selling Options
You can choose from two basic strategies when it comes to options — buy or sell. Meanwhile, when buying or selling, you can do so either with a call or put options,
Buying put options is a great way to make a profit if you’re bearish on an underlying asset. Traders will do this if they predict that the price will be lower than a strike price within the lifetime of the option. This strategy is comparable to shorting.
Meanwhile, buying call options is done when a vanilla trader thinks that the value of the asset will go above the strike price. It’s similar to buying an outright stake in equity.
On the other hand, selling put options at the strike price happens when traders believe that the price will hold the floor upon expiration.
In contrast, selling call options is when the trader thinks that the value of the asset will stay under the strike price until expiration.
Options Profit and Loss Diagrams
In an advanced options trading course, you’ll also learn diagrams that depict profit and loss in options. They will serve as visual guides, making it easy to interpret data. Rather than going through lots of numbers, a quick look at the diagram can provide valuable insights.
These diagrams will help you evaluate the right option strategies before investing. They aren’t just boring tools. You’ll know the potential for profit and loss, as well as breakeven. Hence, you can calculate your next moves to reduce the risks.
The profit and loss diagram in options is drawn in a grid. It has a horizontal axis, which represents the price of the underlying asset. On the other hand, the vertical axis shows the profit or loss on a per-share basis.
Small Account Options Strategies
A lot of people may have second thoughts about starting options trading. Among others, a common reason for such is not having enough money. However, one of the best things about options trading is you can start even if you don’t have a lot.
You can start small and build your way up. It’s also a great way to limit your losses.
The key to success in options trading with a small account is to pick the right strategy. There’s no right or wrong option. However, one of the best to consider is the bull flag pattern.
Basically, the bull flag is a continuation chart pattern. It’s an uptrend, which can signal a continuous increase in price. Hence, you must know when to enter to take advantage of the favorable market direction.
Our Elliott Wave Trading Indicator allows for a “With Trend” trading strategy which is great for options trading. Learn more about the basics HERE
Consistency is another strategy that you must practice. Even when making small investments, do it often. In the end, the gains can accumulate, and you’ll make significant profits. Options Trading Training takes time and patience.