Making your first trade can be daunting, but it doesn’t have to be. Here we’ll discuss the best way to start trading listed options and provide tips to help you get started. Remember, always consult with your financial advisor before making any investment decisions.
What are options, and how do they work?
An option is a contract that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a specified price on or before a specific date. Options are traded on exchanges such as the Chicago Board Options Exchange (CBOE) and can be bought and sold through most online brokerages.
When you buy an option, you pay a premium for the right to purchase or sell an asset later. The premium is the price you pay for the options contract. It comprises two parts: the intrinsic value and the time value.
The intrinsic value is the difference between the strike price and the underlying asset’s current market price. In contrast, the time value measures the option’s volatility and how long it has until expiration.
Investors often use options as a way to hedge their portfolios or to speculate on the future price movements of an underlying asset. For example, if you own shares of XYZ stock, you may purchase a put option as a hedge in case the stock price falls. Or, if you think XYZ stock is going to rise, you may purchase a call option to speculate on its future price movement.
Similarly, if you purchase a put option and the underlying asset’s price falls below the strike price, you may choose to exercise your option and sell the asset at the strike price. If you don’t exercise your option by its expiration date, it will expire worthlessly, and you will lose your premium.
Types of options
There are two types of options: calls and puts.
A call gives the holder the right to buy an asset at a specific price (the strike price), while a put gives the holder the right to sell an asset at a specific price.
For example, let’s say you purchase a call option on XYZ stock with a strike price of $50, and the stock is currently trading at $49. If the stock price rises above $50 before expiration, you may exercise your option and buy the stock at $50. If the stock price doesn’t rise above $50, your option will expire worthlessly, and you will lose your premium.
On the other hand, if you purchase a put option on XYZ stock with a strike price of $50 and the stock is currently trading at $51, you may choose to exercise your option and sell the stock at $50. If the stock price doesn’t fall below $50, your option will expire worthlessly, and you will lose your premium.
What is the best way to start trading listed options?
Now that you know a little about how options work, let’s discuss the best way to start trading them.
Before you begin trading options, you must have a solid understanding of the risks involved. Options are a leveraged investment product which can provide greater returns than stocks but also come with more significant risks. It’s important to understand these risks before you begin trading.
Once you understand the risks involved in options trading, you can begin to develop a trading strategy. Many different strategies can be used when trading options, so it’s crucial to find one that fits your investment goals and risk tolerance.
It’s also essential to clearly understand the different types of options contracts: calls and puts. As we discussed earlier, calls give the holder the right to buy an asset at a specific price, while puts give the holder the right to sell an asset at a specific price.
Once you understand how options work and have developed a trading strategy, you can begin looking for opportunities to trade. You can use online brokerages or trading platforms to trade options, and many online brokerages offer free demo accounts so you can practise trading before putting real money at risk.
When selecting an online brokerage, choosing one that offers robust research tools and resources is essential. You’ll also want to ensure the brokerage offers competitive commissions and fees.
Once you’ve selected an online brokerage, you can look for trading opportunities. It’s important to remember that options are a leveraged investment product, which means they can provide greater returns than stocks but also come with more significant risks. Find out more by visiting https://www.home.saxo/en-sg/products/listed-options.