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Options Trading for Beginners: Strategies for Getting Started

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Options can provide flexibility for investors at every level and help them manage risk. To see if options trading has a place in your portfolio, read through the basics of what options are, why investors use them and how to start trading.

What are options? An option is a contract to buy or sell a stock, usually shares of the stock per contract, at a pre-negotiated price and by a certain date.

Just as you can buy a stock because you think the price will go up or short a stock when you think its price is going to drop, an option allows you to bet on which direction you think the option trading for dummies of a stock will go.

The Basics of Trading Options Contracts

Sell the contract to another investor. Let the option contract expire and walk away without further financial obligation. But options are useful for long-term buy-and-hold investors, too.

  1. Although some option contracts are over the counter, meaning they are between two parties without going through an exchange, standardized contracts known as listed options trade on exchanges.
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Learn the differences between options and stocks Why trade options? Investors use options for different reasons, but the main advantages are: Buying an option requires a smaller initial outlay than buying the stock.

An option buys an investor time to see how things play out. An option protects investors from downside risk by locking in the price without the obligation to buy.

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You also can limit your exposure to risk on stock positions you already have. If the share price does indeed tank, the option limits your losses, and the gains from selling help offset some of the financial hurt.

That education can come in many forms, including: Online options trading courses.

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One-on-one guidance online or by phone. Face-to-face meetings with a larger broker that has branches across the country. Even better, if a broker offers a simulated version of its options trading platform, test-drive the process with a paper trading account before putting any real money on the line.

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Consider what kind of contact you prefer. Live online chat?

Everything you need is here in this easy to understand tutorial.

Phone support? Does the broker have a dedicated trading desk on call? What hours is it staffed?

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  • Option buyers are charged an amount called a "premium" by the sellers for such a right.

What about representatives who can answer questions about your account? Even before you apply for an account, reach out and ask some questions to see if the answers and response time are satisfactory. Make sure the trading platform is easy to use Options trading platforms come in all shapes and sizes. They can be web- or software-based, desktop or online only, have separate option trading for dummies for basic and advanced trading, offer full or partial mobile functionality, or some combination of the above.

You can take an options trading course or read books on the subject to do this. You will also want to review the specifics and operational mechanics of any options contracts you plan on trading, since missing an expiration date, not knowing the amount of risk you are taking or transacting the wrong type or style of option can be a costly mistake. Step 2: Connect to the Internet. Since you will generally want to trade options online via a trading platformhaving a relatively modern computer or mobile device connected to the internet is virtually a necessity.

Some things to consider: Is the platform design user-friendly or do you have to hunt and peck to find what you need? How easy is it to place a trade? Can the platform do the things you need, like creating alerts based on specific criteria or letting you fill out a trade ticket in advance to submit later?

How reliable is the website, and how speedily are orders executed?

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This is a high priority if your strategy involves quickly entering and exiting positions. Does the broker charge a monthly or annual platform fee? If so, are there ways to get the fee waived, such as keeping a minimum account balance or conducting a certain number of trades during a specific period?

Some of the basics to look for: A frequently updated quotes feed. Basic charting to help pick your entry and exit points. Screening tools.

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Those venturing into option trading for dummies advanced trading strategies may need deeper analytical and trade modeling tools, such as customizable screeners; the ability to build, test, track and back-test trading strategies; and real-time market data from multiple providers.

Check to see if the fancy stuff costs extra. For example, many brokers provide free delayed quotes, lagging 20 minutes behind market data, but charge a fee for a real-time feed.

Similarly, some pro-level tools may be available only to customers who meet monthly or quarterly trading activity or account balance minimums.

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But because commissions provide a convenient side-by-side comparison, they often are the first things people look at when picking an options broker. A few things to know about how much brokers charge to trade options: The two components of an options-trading commission are the base rate — essentially the same thing as the trading commission that investors pay when they buy a stock — and the per-contract fee. Some brokers bundle the trading commission and the per-contract fee into a single flat fee.

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Some brokers also offer discounted commissions or option trading for dummies fees based on trading frequency, volume or average account balance. About the author: Chris Davis is a NerdWallet investing writer. He has more than 10 years of agency, freelance, and in-house experience writing for financial institutions and coaching financial writers.

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