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Since there are so many available options - and so many ways to trade them - you might not know where to begin. But getting started is easier than you think, once you determine your goals |
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How to trade options |
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Before you begin trading options it's critical to have a clear idea of what you hope to accomplish. Options can play a variety of roles in different portfolios, and picking a goal narrows the field of appropriate strategies you might choose. For example, you might decide you want more income from the stocks you own. Or maybe you hope to protect the value of your portfolio from a market downturn. No one objective is better than another, just as no one options strategy is better than another - it depends on your goals. Once you're ready to invest in options, you need to choose a brokerage firm. Your firm may offer helpful advice as well as execute your trades. Some firms go further by working with clients to ensure that in both visible and invisible ways, options trading fits into their individual financial plans. They also advise clients about potential objectives and strategies, and outline the risks and benefits of various transactions. Some options investors choose discount firms that charge lower commissions, but don't offer personalized advising services. But others, including both inexperienced and veteran investors, prefer to consult their brokers before opening or closing out a position. You can't purchase options on margin, as you can with stocks.
But some brokerage firms require that certain options transactions, such
as writing uncovered calls, take place in a margin account. That means if
you write a call, you'll have to keep a balance in your account to cover
the cost of purchasing the underlying stocks if the option is exercised.
This margin requirement for uncovered writers is set at a minimum of 20%
of the underlying security minus the amount the option is
out-of-the-money, but never less than 10% of the security value. If the
value of the assets in your margin account drops below the required
maintenance level, your brokerage firm will make a margin call, or notify
you that you need to add capital in order to meet the minimum
requirements. If you don't take appropriate action, your brokerage firm
can liquidate assets in your account without your consent. Since options
can change in value over a short period of time, it's important to monitor
your account and prevent being caught by a margin call. Options trading
fits into their individual financial plans. They also advise clients about
potential objectives and strategies, and outline the risks and benefits of
various transactions. Some options investors choose discount firms that
charge lower commissions, but don't offer personalized advising services.
But others, including both inexperienced and veteran investors, prefer to
consult their brokers before opening or closing out a position. Belt, and
the more liquid assets you have to invest, the higher your approval level.
Firms may also ask you to acknowledge your acceptance of the risks of
options trading. |
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