Steps To Follow While Options Trading

Trading options involves purchasing and selling an underlying asset at a pre-determined price by a specified future date.

Options contracts are derivative contracts that give buyers the absolute right (but not the obligation) to buy or sell an underlying asset at a pre-determined price and by a specific future date. Underlying assets can range from stocks and bonds to market indices or derivative contracts.

If you intend to embark on your options trading journey, follow all the steps mentioned below:

Open an Options Trading Account

Compared to a simple brokerage account for stock trading, an options trading account usually requires greater capital involvement. Besides, because of the higher complexity, brokers require more information about the trader.

After successfully opening the options trading account, you must decide on the type of options contract you want to enter. If you expect the market to increase, buy a call option or sell a put option.

Select The Options Contract

Predict The Strike Price

An option contract is valuable only if the underlying stock price closes the option's expiration period “in the money,” i.e., either above or below the strike price. So, predicting the correct strike price is extremely important.

Note: you cannot choose just any strike price. Option quotes, also called option chains or matrices, consist of a range of available strike prices based on the stock price, and their increments are standardized across industries.

All options contracts have an expiry date, ranging from days to months to years. This period, too, cannot be conjured up from thin air. Daily options generally possess a higher risk.

Predict The Option Time Frame

Swipe up to learn more!