Find out what analysis tools and real-time data are available on the platform for free, and which require you to pay an extra fee. Determine when customer service is available and what kinds of service are provided. If you’re new to trading options, look for a broker that has a dedicated trading desk. Evaluate the fees and commissions that you’ll pay to your broker. Some charge a flat fee per purchase. This may be a better deal for you if you anticipate high-volume trading. Others charge a per-contract fee plus a commission.
You may want to look at the broker’s options agreement in advance so you have a better idea of the type of information you’ll need to provide.
Depending on the broker, you may be required to submit documents to back up information you included in the agreement, such as account statements. If you already had an investment account with the broker, they may not need additional documentation to process your agreement.
Typically, level 1 would indicate the lowest level of risk, while level 5 would indicate the highest level. Keep in mind that any level of options trading carries an inherent degree of risk. Brokers generally assign trading levels based on the resources you have available and your experience as a trader. Your broker will explain what level you’ve been assigned, and the types of trades you can make at that level.
Before you start trading, make sure you understand the process and the risks involved. The SEC has an introductory bulletin available at http://www. sec. gov/oiea/investor-alerts-bulletins/ib_introductionoptions. html. You can also take advantage of training and educational resources offered by your broker.
In addition to looking at the stock market itself, you also have to be able to analyze trends in various industries. Understand which sectors will tend to go up and which will tend to go down in response to various economic factors. If you don’t have a lot of experience trading, you may want to watch the market for awhile before you start buying options. Take advantage of any educational resources and training offered by your broker to learn more about how options work.
To make money on put options, you want to set the strike price lower than the price for which the stock currently sells. For example, if a stock is currently selling at $100, but you believe it will decline to below $80, you might buy a put option to sell shares at $85. If the stock price drops below $85, you could sell those shares at a profit. Strike prices are standardized based on the price of the stock, and sold in option chains that have a range of strike prices at varying expiration dates.
Longer time periods give you more options if the stock doesn’t move the way you’ve predicted it would. If you’re just starting out, you’ll probably want to go with monthly or yearly expiration dates. You may be restricted to longer-term options depending on your trading level, especially if you’re a new trader.
The number of contracts you buy depends on how much money you have available and how much you’re willing to risk on the prediction you’ve made about the movement of that stock.
If your broker has a tutorial available, you may want to go through that first to make sure you’re doing everything correctly.
Most brokers allow you to set alerts that will send you a notification when a stock falls below a certain level. You can use these alerts to more easily manage your options.
If the stock declines below your strike price, you are “in the money” if you have a put option. You can put your options to the seller and the seller will have to buy the stock at your strike price, even though it’s currently trading for less. For example, suppose you have 5 contracts (representing 500 shares of stock) with a strike price of $100. The underlying stock of those contracts drops to $80. When you put those options to the seller, the seller is obligated to pay you $50,000. Since the underlying stock is only worth $40,000, you’ve realized a $10,000 profit.
For example, suppose you have 5 contracts (representing 500 shares of stock) with a strike price of $100. The stock dropped to $80, then rebounded to $85 and is trending upward. If you sell the contracts at the strike price, you will make $7,500. When you sell an option, you then become obligated to purchase the stock at the strike price. To continue the example, suppose the stock continues to rise to $125. If obligated to buy the stock, you would make an additional profit because, after buying the stock for $100, you could turn around and sell it for $125.
When you let an option expire, you’ll be out the premiums and fees you paid for the option, but that would be all you would lose.
