Should You Start Trading Options?

First off, what the heck are options? They are a derivative security, which means they are not the security itself, but are contracts that give you the right – not the obligation – to sell or buy the security. A security can be anything from a stock to a commodity. You might have heard of derivatives in a very negative light, since they were responsible for the 2008 crash, but options were not a part of that specific group. Trading options can be risky, but it isn’t as risky as some other derivatives.

So, when you get an option, you’re entering a contract that you paid for (with what’s called the premium) that gives you the opportunity to sell or buy the security at a set price (called the “strike”) before or on a certain date (called the “expiry”). The closer the option gets to expiration, the less valuable it becomes. Whether you want to sell or buy involves choosing between a call option or a put option. A call option gives you the right to buy, while a put gives you the right to sell. If you have a put option, you are known as the “writer,” and if someone wants to buy, you are required to sell to them. You are in what’s known as the “short” position, and you profit if the value of the option falls. If you are a buyer, you’re in the “long” position, and you want the value of the option to go up.

There’s a lot more to trading options that can become very complicated. You need a broker who trades on your behalf and on your orders, and a good knowledge of the different strategies involved in options. You also need to know how to read what’s called an option table, or options quote, which gives a bunch of information on a security’s volatility, what time is doing to the option’s value, and so on.

What are the benefits of options trading? There are quite a few. For one, it’s cheaper initially, because buying an option doesn’t cost as much as buying the actual security. That also means there’s a potential for more profit, if a trade ends well. Unlike with stock trading, options trading has more strategies you can utilize, including multiple transactions at once and combinations of puts and calls. You can make a profit even if your option’s security isn’t objectively doing well. If you know what you’re doing, options trading can also be less risky than stock trading. There are ways you can protect yourself from losing too much.

That being said, there are still risks. The biggest one is that unlike stocks, options expire with zero value, so your time is limited. Prices also move way faster than stocks, and can see dramatic rises or falls in mere seconds or minutes. That’s why it’s so important to know how to use the different strategies available to you, so you aren’t glued to every teeny change in the market and freaking out.

To be a successful trader, you need to be cautious. Good options traders don’t take big risks; they prefer small, steady income over big jackpots. They also are excellent planners, and have a strategy in place for every market scenario. They keep their emotions out of it, too, so they aren’t reacting rashly out of fear. Options trading is a bit like poker that way – it takes skill, a cool head, and an ability to predict what’s going on around you.