There’s a whole new world of trading nowadays where you can trade stocks, futures, forex, and commodities without practically owning them. How? With options trading!
But before we can talk about trading them, we need to define what an option is. Quickly: an option is a derivative that represents a contract sold by one party to another —a contract offering the buyer the right, but not the obligation to buy (call) or sell (put) a security, a financial asset, a forex condition, or a commodity deal at a price that both the broker and the trader agree upon during a particular period of time and for a specific duration.
Buying an option means purchasing a “call”, or the contract that the price would go up. On the other hand, selling an option means purchasing a put, or the contract that the price would go down.
For a simplified guide, check out: https://www.personalincome.org/options-trading-for-dummies/
Owning an Options Contract
Owning an options contract is more like owning a derivative, which is a financial instrument that derives its value not from its own worth, but from its value relative to the underlying value of the security and the time when the contract ends.
For example, owning an IBM option does not mean that it has an intrinsic value. In fact, as this IBM option nears its end and is almost winning, then its value is increasing, and as it finally wins, then its value is the maximum value that was agreed before the trade was carried out.
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Moreover, options function somewhat like contracts, in that they have expiration dates. The value of the option is determined as it nears its expiration, and its true value is only realized after the contract ends. The option trades and the time is consumed only during the time that the security or asset is being traded. For example, if you bought a EUR/GBP forex option, you can only determine its value during weekdays as EUR/GBP is not traded during weekends.
Options can be any of the following: stocks, commodities, indexes, and forex.
In stock options, you choose a particular stock like Apple, Google, or Amazon, and determine whether it will go up or down in the next few minutes or years. If you bought a Google call on Monday 04:33 at an agreed 50% of your money and if it goes up before its expiration on Tuesday 04:33, then your $100 will turn into $150 in 24 hours.
On the other hand, if it falls by the time it reaches the expiration, then either your $100 becomes $10 (decrease of 90%) or $0. However, since in option trading, everything is laid out already, then your amount of loss is already predetermined.
It is therefore imperative that you should study whether a company has been going up or going down. You should use both technical (using graph interpretation) or fundamental (using analysis of news and events) analysis of a stock before deciding on whether to call or put.
Commodity, Index, & Forex Options
If you feel that stocks are hard to trade, then you can do commodities like oil, gold and silver; indexes like NASDAQ or Nikkei; or forex like EUR/USD or USD/JPY, whichever it is you are comfortable with. There must be at least one asset type that you are good at. The good thing is that you can always get proper education before investing. The key to this is choosing a good broker.
Option Trading Platforms
There are good platforms and brokers for option trading that provide not only e-books and personalized training, but also virtual accounts that you can use to practice trading the assets using virtual money and at absolutely no cost to you (check out a few here)
One of these good brokers is OptionsHouse.com, where you can have almost total freedom to manipulate the financial conditions of your options, which can range from forex, commodities, stocks, indices and even random indices. With OptionsHouse, you can have even other styles of trading like ends between/ends outside, stays between/goes outside, or touch/no touch options. A touch option means that if the asset graph touches the specified value, you win; if it doesn’t, you lose. It is entirely opposite with a no-touch option. Moreover, what is good about Binary.com is that it has plenty of materials for you to study and practice with.
Another broker is OptionsXpress.com, where there is always a competition among traders, multiple language support, personalized trading and almost daily updates.
Creating Monthly Cash Flow with Options
The good thing about options is that you can always create a regular monthly cash flow with any good broker or trading company. You can do this either by playing it safe or trading using a variety of financial trading tools like MACD or other technical graphs; in fact there are a number of strategies you can use to generate cash flows using options; this video by OptionsTradingPro covers a few:
When you are not very good at trading options, you can turn a profit by playing it safe trading only small amounts but with very favorable trading conditions or with obviously winning results. You can also try practicing with an options trading simulator. However, if you think you are good at this already, then you can do well with all the financial tools ready and you can constantly target big wins.
However, you can only do this if you can recognize a good timing or favorable times to trade. If you still think that options are just too complicated for you, then perhaps you are into stock market trading or investing.
Owning Options vs Stocks
Owning shares in a stock means that you have to purchase stocks directly from the company that you wish to buy shares from. The brokers are different here, but basically the same thing goes, only that you are buying more expensively since these are actual shares of stocks that you are dealing with.
Etrade.com is also a good broker for stock trading, though you'll need to risk a larger amount of money, like if you want to buy Apple shares at $570 each, then you need at least $2280 to buy just 4 shares, and you still don’t know when you’re gonna hit a profit – perhaps in a year or so. However, you can buy a $500-option and if you know it is going to go up and it does, then you get as much as $900 after a single trading day.