Beginner strategies and where to go next
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Trading options is complex, therefore knowing the basics is extremely important and can help you to better understand how this instrument works. To achieve this, the best is to choose a great trading platform to use.
Options trading for beginners
Options explained
Check out our article entitled What is options trading? for a quick overview of the most important definitions for an options trader.
Let’s sum up the most important details about options:
- Options belong to the group of derivatives, meaning that the derivative’s price is dependent on an underlying product such as stocks, indexes, commodities and others
- A financial option is a contractual agreement between two parties, giving the right to the buyer to buy (call option) or sell (put option) an underlying asset at a pre-determined price before the option expires
Options trading for beginners
Beginner strategies and where to go next
How should a beginner start to trade options? How to evaluate strike prices? When to trade? These questions are among the most important ones when it comes to options trading.
Dr. Alan Ellman from The Blue Collar Investor gives the following advice.
A Beginner’s Guide to Options Trading
For those new to options, the most suitable introductory strategy involves writing covered calls. However, before committing any actual capital, retail investors must first develop proficiency in three fundamental areas:
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Stock selection
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Option selection
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Position management
Approaches to Strike Price Determination
Selecting appropriate strike prices depends upon individual risk tolerance, prevailing market conditions, and specific return objectives (what profit level are you targeting?). An aggressive covered call writing approach utilizes strike prices exceeding the stock’s current market value. This methodology generates dual income streams per transaction: option premium revenue plus share appreciation from present value up to the elevated strike price. Conversely, a defensive covered call writing approach involves selling call options at strike prices below current market value. While this yields higher premiums offering enhanced downside protection, it forfeits potential share appreciation.
Optimal Trading Windows and Execution Methods
Options transactions should occur during standard market sessions utilizing limit orders (specifying a particular price or improved rate). Personally, I prefer executing trades between 11:00 AM and 3:00 PM Eastern Time. This window circumvents the heightened volatility characteristic of early morning and late afternoon sessions, which typically results from institutional algorithmic trading activities. Position adjustment transactions may be executed whenever advantageous opportunities emerge.
Options trading for beginners
Best options brokers
At BrokerChooser, we are in the business of helping investors find the best brokers and trading platforms for their needs. True to our mission, we went ahead and did the research to identify the best options trading platform in 2021.
What makes a trading platform good for options? First of all, it needs to offer fair fees for options trading and withdrawal. A high-quality desktop trading platform and advanced research tools are also essential. And finally, a wide selection of options products is an important factor.
We analyzed almost a dozen brokers and the result was a list of the Best options trading platforms. Check it our for further explanations on options and fees for options.
Options trading for beginners
Where to look for more?
Hope you liked this quick rundown about options. If you’d like to go deeper, navigate to one of the articles below:
- What is options trading?
- Options trading examples
- The pricing of options
- How should a beginner options trader manage their risks?
- What are the benefits of writing an option?
- Options trading strategies
- What is a binary option?