Getting Ready To Trade Options
Getting Ready To Trade Options
Getting Ready
to Trade Options
Important facts you should know before placing
your f irst options trade.
How to
avoid the
7 biggest
mistakes
new options
traders
make
Getting Ready to Trade Options 1
Welcome! By reading this booklet, you’ve taken the first
step toward becoming a successful options trader. We created
this guide to provide you with the essential information you
need to understand options trading. After all, trading options
comes with its own set of unique guidelines similar to, but
still very different from, trading stocks, bonds or commodities.
Trading options requires a distinctive
set of skills and a new way of thinking
about the markets. Inside
1. Why trade options?
7 Common Mistakes 2. What is an option?
Before you get started trading 3. Is options trading risky?
options, be aware that there are some 4. How do I develop a trading
common mistakes that a new options plan?
trader might make. Here are 7 that are 5. Do I need a broker to trade
easy to avoid if you are aware of them options?
from the start: 6. Can anybody trade options?
7. How are commissions
calculated in options
1. Assuming that it takes a trading?
professional trader to succeed 8. How much money do I need
with options to start trading?
• Individual investors can trade 9. Do I need a computer to
trade options?
options very successfully without
10. Do I need special software?
having to have spent any time on
11. Can I practice before I make
the market floor. People around real trades?
the world are learning options 12. Can I trade options full-time?
trading thanks to the availability 13. Can I trade options after
of great education, online access market hours?
to research, analysis, and brokers 14. Can I really double or triple
who are dedicated to the success my money?
of the individual investor. 15. Do I need an investment
advisor or financial planner?
2. Not having a pre-defined plan for 16. How are taxes treated in
options trading?
each trade
17. Where can I learn to trade
• Sounds straightforward, but many options?
new traders skip this step. Before 18. What should I look for in
entering a trade, be sure to have a an investment education
plan for entry and exit of the trade. company?
2
Q
Optionetics
Q
Getting Ready to Trade Options
By simply learning to manage risk, you can actually create positions with a higher
probability of profitability and accumulate healthier profits in less time than
trading stocks.
Whatever your personal financial goals are, infusing your long-term investments
with options may be just the trick to increase your income or savings, protect
against market downturns, and give you the leverage you need to be successful
in the markets.
Another great advantage of trading options is that you can actually make a
profit in up, down, or sideways markets. Can your traditional mutual fund do
that? In fact, trading options allows you to make money regardless of market
direction. By buying put options, you can achieve leveraged gains with limited
4 Optionetics
dollar risk when a stock price declines; and by purchasing call options, you can
make leveraged gains on stock price increases. You can also use specific trading
strategies that allow you to profit in flat markets as well.
2. What is an option?
Options are flexible investment instruments. Every option derives its value from
an actual stock, which means that an option’s value is directly dependent on the
price movement of its underlying security.
Essentially, an option is a contract that gives you the right, but not the obligation,
to buy (call) or sell (put) shares of the underlying stock. Each contract
represents 100 shares of the underlying stock.
Note: Buying a stock option contract does not obligate you to purchase or sell
actual shares of the underlying stock. It only signifies that you have the right, or
option, to buy or sell.
Options have five main standardized terms by which they are defined: type of
option (call or put); underlying asset; strike price; expiration date; and option
premium. These terms distinguish each individual option from every other
available option. Every time you enter a trade using options, these five terms
define the parameters of your trade. To maximize your chances for success, it is
essential to understand how these factors affect the nature of each trade.
The date an option expires is referred to as the expiration date. A stock option
expires prior to close of business on the third Saturday of the expiration month.
Therefore, as a retail trader, you must exit an option’s position by the close of
business of the Friday before.
In addition, all listed options have options available for the current month
and the next month, as well as specific future months. Each stock has a
corresponding cycle of months in which options are offered. Three fixed
expiration cycles are available, each with a four-month interval:
Getting Ready to Trade Options 5
1. January, April, July, and October
2. February, May, August, and November
3. March, June, September, and December
The price of an option is referred to as the option premium. It represents an
option’s price, and is comparable to an insurance premium. If you are buying
a put or a call option, you are paying the option holder a price for this privilege.
This best explains why so often price and premium are used interchangeably.
Four tips
the following five factors:
• Price of the underlying stock in relation to
the option strike price
• Time left until expiration for Managing Risk
• Volatility of the underlying asset
• Current interest rates
• Dividends (if any) of the underlying stock 1. Define your risk
parameters.
3. Is options Predefining your acceptable
risk limitations ensures that you
trading risky? cannot lose more money than
your maximum position loss.
Trading is an art that requires practice, dexterity,
and the ability to make quick decisions based 2. Be flexible.
on experience and observation. Mastering this A flexible trading plan enables
art requires practice, grace, determination and you to optimally respond to
flexibility. market movements and to
be entrepreneurial in seizing
When used properly, options give traders the profitable opportunities.
opportunity to achieve 5, 10, and even 20 times
the gains achieved by stock or mutual fund 3. Start by specializing.
investing, and with significantly reduced risk.
Since options cost dramatically less than stocks, When you’re just starting
risk can often be limited to mere cents on the out, specializing in just a few
dollar when compared to buying stocks. However, strategies allows you to refine
trading and investing in securities always carries your trading skills and develop
a degree of risk, and you may lose money. The tactics that consistently work
bottom line? Only trade with “risk capital” – in certain recognizable market
money you can afford to lose. conditions.
As an options trader, your main concern should be getting the transaction executed
according to your wishes at the best possible price. A good, unbiased broker with in-
depth knowledge of options trading is your best bet to making that happen.
Your brokerage is paid a commission when you place a trade, regardless of whether
the trade makes any money. The commission fee varies depending on what kind of
service your broker provides.
When beginning the process of searching for a brokerage firm, it’s always a good idea
to start with recommendations from friends, colleagues, and fellow traders. Evaluate
potential brokers based on your particular needs and experience. For example, a
seasoned options trader may be quite comfortable with a no-frills brokerage that offers
low commissions and online trading; whereas someone new to options trading may
prefer the hand-holding and personalized assistance that full-service brokerages provide.
www.optionsXpress.com/tradekit
8 Optionetics
7. How are
telephone and online trading
via Internet/computer?
commissions
8. Can I trade after hours?
9. Do you offer streaming real-
calculated in
time quotes?
10. Do you provide stock charts,
earnings estimates, research
reports, screening, alerts, options trading?
quotes, and news on your When you trade options, you pay a commission
Web site? on both the entry and the exit of options
11. Do you offer a trading demo? positions. The commission is added to the
Some sites allow you to total cost or deducted from the proceeds of the
develop hypothetical trades trade. If an option expires worthless, only entry
and view the results. commissions are paid.
12. Is your online broker site easy
to navigate and intuitive to use? Remember that commissions vary widely
Does it allow easy access to the between brokerage firms and can be adjusted
trading portion of the Web site? by factors such as account size and activity,
Getting Ready to Trade Options 9
along with trading method. For example, spreads, straddles, and other trades
are generally charged two commissions, one for each side of the trade. The good
news, however, is that with the expanding popularity of options trading, many
deep discount firms and others that offer highly specialized options trading
expertise are lowering their commission levels.
Your trading plan should provide you with insight into how much you can
comfortably start with. In addition, some – but not all – brokers may have
predetermined minimal investment amounts with which you must comply. Above
all, we recommend starting out conservatively, and investing wisely with money
that you can afford to lose. When you become more skilled and confident in your
trading, you can add more money.
9. Do I need a computer
to trade options?
Modern technology has made options trading easier and quicker than ever,
but you can still place trades using a telephone. However, most options traders
prefer the convenience and speed of a computer. With your home computer and
an Internet connection, you can be up and running in no time. Always make sure
that your computer is secure and keep your passwords protected.
For instance, you can choose among short-term (30-60 days), longer term (60-
120 days) and other specialized trades that can extend up to two years. Your
returns will depend on how much time and effort you are willing to invest in your
trading and what strategies you decide to use. In addition, market fluctuations
beyond your control, resulting from corporate mergers/acquisitions and other
unforeseen world events, can impact your trading outcomes.
Remember that becoming a skilled options trader takes time, patience and
practice. Trading is an art and a science, and requires a commitment in order to
achieve success.
15. Do I need an
investment advisor
or financial planner?
You may already have a good investment advisor or financial planner to guide
you in other aspects of your financial life. As you become increasingly skilled
at options trading and build your assets, you may want to consider attending
wealth-preservation seminars to gain knowledge about how to optimally manage
and protect your money.
Live trading classes and workshops – Live educational events are one
of the best ways to learn about minimizing risk, maximizing profits, and
discovering everything options trading has to offer.
Trading publications – Whether delivered to you online or via standard
postal delivery, informative trading newsletters offer invaluable opportunities
to stay current on market trends. Many are niche-oriented toward specific
premium strategies, and some are free.
Home study materials – Workbooks, study guides, videos, books, CDs and
DVDs allow you to practice and refine your trading skills from the comfort of
your own home.
Trading software – Software applications (with paper trading capabilities)
help you identify the trades that best satisfy your predefined criteria.
Discounts and special offers – Monthly or quarterly promotions make it easy
– and affordable – for you to keep current on the latest trading strategies.
Discussion boards – Interaction with a local or global options trading
community is a great way to exchange ideas, discuss trading tactics, and
gain new perspectives.
Market commentary – Access to the latest data about market conditions,
stocks on the move, and profitable trading strategies can help you
significantly increase your winnings.
Educational articles – Get inside the heads of professional traders and
learn what they recommend, what they avoid, and what you can do to grow
your earnings.
Wealth Preservation Education – Once you increase your profits, it’s a good
idea to educate yourself about the best ways to manage and protect your
money, and explore tax-saving strategies that can really pay off.
14 Optionetics
About Optionetics
Since 1993, Optionetics has provided investment education services and trading
tools to more than 336,000 people from over 50 countries. Every day, our
popular high-reward strategies help traders successfully navigate the markets
and chart paths to financial security. In fact, we not only stand by our pledge to
provide the highest quality investment education possible, we guarantee it.
• classes • publications
• workshops • CDs and DVDs
• home study materials • books
• sof tware
Choose Optionetics for the premier educational resources and tools to help you
become the successful trader you’ve always wanted to be.
Getting Ready to Trade Options 15
About George Fontanills
An active trader, George founded Optionetics to help people understand the world
of stock and options trading. Specializing in delta neutral trading using stocks,
options on indices, and options on stocks, he has instructed thousands of traders
internationally. His trading breakthroughs have led to numerous
guest appearances on radio and television shows all over the
country and have been the subject of articles in the Wall Street
Journal, Barron’s, Research Magazine, CBS MarketWatch,
and TheStreet.com. A published author, his works include The
Options Course, Trade Options Online, The Stock Market Course
and The Volatility Course.
George Fontanills
Contact Us
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255 Shoreline Drive, Suite 100 (888) 366-8264
Redwood City, CA 94065 (650) 802-0700
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