Options Trading Education

Last updated on June 18th, 2015

Calls.  Puts.  Naked options.  Strike price.  If you want to Learn How To Trade Stock Options, you had better understand terminology such as these in order to have any chance of success.  This is where top quality Options Trading Education comes into play.

There are many benefits to Options that lead people to want to learn to trade stock options.  The issue is that they are unlike trading the Futures or individual Stocks where the concern is only on the price of the vehicle.  With Options, there are other variables that must be taken into account that will have an effect on the price which are stock price, time of the option when it expires and volatility.

It may seem complex and when undertaking Options Trading Education, one of the first things you will learn is that stock options will give you the right to buy or sell shares at a certain dollar price before the expiration date of the option.  Think of buying and selling a contract much the way those in the auto industry buy and sell vehicles. This is an easy to understand explanation and this is the type of education you should seek when wanting to learn to trade stock options.

For those of you with a trading background, think of a bullish or bearish outlook.  Using stocks as an example, if you are bullish on stock XYZ, you would buy (premium/cost of the option is taken from your trading account) a call option which allows you to benefit from a bullish move in the stock but with a lower risk and a lower capital investment.  You essentially buy the right to purchase XYZ at the strike or specific price you choose before the option expires (expiration date).  While you have the right to buy, it is not an obligation and proper Options Trading Education will teach you the immense benefits of that.

To further explain our XYZ example, is XYZ increases in value, the Call increases in value and conversely, a decrease in XYZ causes a decrease in the Call.  When you learn to trade stock options, you will see some advantages such as:

  • ·Risking a small amount of money
  • ·Your maximum loss is the cost of the call (the premium)
  • ·Potentially higher returns
  • ·Not having to buy the stock outright

During your Options Trading Education, you will also learn about the disadvantages of our XYZ example:

  • ·Options have an expiry date
  • ·If the stock remains stagnant or decreases in price, the value of the Call will either not change or will decrease in value
  • ·A lackluster stock with very little change will cause your option to lose value.

Keeping with our XYZ example, what if the strike price is lower than the actual price of the stock?  That is called ITM for in-the-money and since stock prices do not really have a price ceiling, can you see the profit potential?

If the strike price is higher than the stock price in our XYZ call option example, that is called OTM for out-of-the-money.  Remember though, you have the right but not the obligation  to buy the stock at the strike price until the option expires.  You choose not to buy the stock in an OTM position and your loss is the premium paid for the call option.

One of the more complex side of Options is how they are priced.  This is where solid Options Trading Education by companies such as Netpicks comes into play.  This will be covered in greater detail when you learn to trade stock options but here is what is used to calculation an option price where we know the historical volatility of the stock such as XYZ.

  • ·Stock price
  • ·Strike price
  • ·Time to expiry
  • ·Volatility
  • ·Interest rates
  • ·Dividends

If I were to state the my top three reasons to get Options Trading Education and take a look at trading these, they would be these.

1Lower capitalized traders can take advantage of the stock market.  For example, if I wanted to buy a share of Netflix (NFLX) today, I pay $283.91 or for 100 shares, $28391.  I can participate in that market for much less using options depending on strike price, expiry date.

2High profit potential

3Limited downside risk

I can’t give a full scale and in-depth Options course in this brief post.  I highly suggest if you are looking to learn how to trade stock options, you investigate companies such as Netpicks who offer an entire Options Trading Education course that can fill in all the benefits, risks and how to get started in the Options side of trading.

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