Options trading firms for not beginners pdf

The Best Options Broker. Latest Update October 28, 2016. The best options trading platform isn’t going to be an afterthought tacked on to an existing suite of products: it should be robust and easy to use. Beginners need enough support to learn the ropes and experienced traders are after low fees and powerful tools. We signed up, assessed the fees, took the tools for a spin, and narrowed it down to three top picks. The one that's best for you depends on what you’re after. Tons of online and in-person support, plus a practice platform that lets you try everything out with “paperMoney.” The downside? Higher fees. Rock-bottom pricing, but no research or method support. Unrivaled tools & research with pricing that favors active traders. There are a lot of brokers that are perfectly capable of trading options — nearly all of the big (read: old-school) names have an options platform integrated into their suite of offerings. But for those looking to really dive in, whether as a beginner just starting out or an active trader looking to level up, the best platform won’t be something that’s just tacked on. How We Found the Best Options Broker. To find the brokers that cater specifically to options, we looked at 36 choices and analyzed their products.

We prioritized the most important aspects: Cost matters a lot when it comes to trading options. It’s the very nature: part of the appeal of options is that the returns can be major even if you don’t fork over a lot of cash up front, and many traders use options as a cheaper alternative to going long on a high-priced stock. Fees can add up and even wipe out the profits from any profitable trades. Granted, slightly higher fees may be worth it if a broker can provide other perks (say, excellent resources and education for beginners), but we wanted all our picks to have competitive pricing. We also wanted to avoid minimum balance requirements, or a set number of trades per month. Easy-to-use interfaces are a make-or-break for most platforms. The price of options contracts can swing a lot over the course of a trading day poking around a clunky options chain can literally cost you. Education and resources are important, especially for investors who are getting their feet wet. Sure you’ve got a handle on multi-leg options trades, but do you know when it’s the right time for a bull call spread? What’s an iron butterfly? Not all traders will need hand-holding, but we wanted to find at least one excellent options broker we could recommend to newcomers. Flexibility can be interpreted a few ways. For us, it meant the robustness of the platform (could we research and purchase stocks and ETFs in addition to options?

) its flexibility (could we streamline a multi-leg options trade, or did we have to input them all separately?) and whether or not we could customize it to our liking. It was quick work to eliminate the most expensive platforms, as well as the ones that had absolutely no resources or reports. To test ease of use and flexibility, we signed up for accounts and simulated making trades on all the rest. Three brokers rose to the top, and each brings something unique to the table. Our Picks for Best Options Broker. TD Ameritrade Higher fees on an ultra-easy platform. Plus, tons of support and education. TD Ameritrade is one of the largest online brokerages in the market today, with over 7 million funded customer accounts and over $700 billion in total client assets, and despite its slightly higher prices, it provides the best platform for a beginner trading any product, options or otherwise. For more novice traders, the platform supports the jump from trading stocks with the funds in an IRA to more sophisticated products like options. It’s robust, plus it has the customer service and educational resources to make the transition. There are webinars and hours of on-demand videos that’ll teach you about options strategies and how to literally execute those strategies on the platform. TD Ameritrade is a full-service broker, and that full service (we’re talking 247 customer service and 100 branches for face-to-face consultations) does come with higher fees. Barron’s agrees, awarding it “best platform for novices” five years running.

We can anticipate its service only getting better too. In 2016, TD Ameritrade started the process of acquiring Scottrade, another platform known for it’s in-person customer service offerings. In fact, TD Ameritrade is one of the best platforms for all levels of investors, serving up two discrete products: thinkorswim and Trade Architect. Thinksorswim is a desktop platform designed for an all-around trading experience: charts with real-time data, news tickers, 300-plus technical studies, alerts and alarms, heat mapping, options screeners, securities scanner, and more, all accessible in a single click. It’s definitely for seasoned investors — newcomers will likely be overwhelmed — but it’s worth bringing up because a virtual playspace called paperMoney allows even total novices to cut their teeth without risking even a single penny. We recommend beginners stick to TD Ameritrade’s web-based platform Trade Architect. It is nowhere near as robust as thinkorswim (and has nowhere near as jazzy a name), but it provides everything a new investor would want and it’s ultra-easy to use. It’s not bogged down with all the bells and whistles and live-streaming CNBC. Tabs at the top are simply categorized under jargon-free headings: account overview, watch lists, alarms, idea generators, and heat maps. Unlike thinkorswim, the platform is customizable. If you want more widgets, like say, additional stock tickers or video, they’re there for the adding.

If beginner investors use TD Ameritrade’s education library to learn the ropes, practice using paperMoney in thinkorswim, and then easily execute trades with Trade Architect, the slightly higher fee may suddenly seem worth it. OptionsHouse The lowest fees and no minimum balance requirements. OptionsHouse isn’t the most recognizable name in the industry, and that’s probably because this online broker hasn’t pursued an aggressive marketing campaign like some of the other brokers out there (remember E*Trade’s old Super Bowl ads?). The company was founded in 2005 and was established to specifically provide options traders who demanded lower fees from the then burgeoning online brokerage industry. Those low fees are still what makes OptionsHouse so popular. There’s a $0 minimum deposit to join and options trade at $4.95 + $0.50contract (stocks trade at a flat $4.95 fee). This is the lowest price in the industry. Only TradeKing comes close — matching that $4.95 options base fee, but charging $5 more than OptionsHouse for the exercise fee. The OptionsHouse platform is striking if a bit chaotic — there are buttons, tabs, and menus all over the place. It’s intuitive and there’s a tutorial to walk you through, but to a beginner it might seem more like sitting in front of the controls of an aircraft than is comfortable. Beginners take note: OptionsHouse does have a virtual platform that’s great for practicing. And, the tradeLAB makes dissecting options spreads simple — the green smiley face is good the red frown is no good. What you won’t get for those low fees is method and research: OptionsHouse has about 30 technical studies TD Ameritrade has 300.

It’s important to note that E*Trade purchased OptionsHouse for a whopping $725 million in 2016. It is still unclear how any pricing structures or account features and perks will change after the sale is completed, but an OptionsHouse blog post suggests that E*Trade’s tools and services will become available after the platforms merge. Best Tools and Research. optionsXpress A one-stop shop within a major firm, with an options-native platform. OptionsXpress was purchased by Charles Schwab back in 2011 to enhance Schwab’s competitive edge in options trading. The result is a one-stop shop with an options-native platform that’s pretty whiz-bang. Everything happens through the desktop platform, Xtend, but all the trading tools are also on the optionsXpress web platform. It’s fully customizable, and it’s easy to find real-time quotes and market data, news and reports, and company background information. The Idea Hub scans the market for volatility, earnings, and income-based strategies and offers new trade ideas. With Walk Limit, you can set a few parameters, and it will scan updated market data and re-create an order you may have made at a higher price in the past. Sign up for the Xpresso newsletter and you’ll get a daily email alerting you to the day’s risks and opportunities. Add to that an impressive library of educational resources, as well as access to all of Charles Schwab’s investment research (and free access to its seminars and meetings at local branches), and a virtual trading platform that helps beginner investors practice all types of trading with $25,000 in fake cash. If you need help from a broker — to calm your first-timer nerves or to walk you through a complex method — they’re ready to help and totally free, too.

The standard rates are steep, so we don’t recommend optionsXpress to the casual trader. Make more than 35 trades a quarter and you’ll click into “Active Trader” status and your fees will go down. Trade in volumes and there’s another discount trade contracts under a nickel and there’s another discount. This is all to say the price structure favors the active. And while optionsXpress has a $0 account minimum and does not charge any annual or inactivity fees, if you leave, there is a $60 full outgoing transfer fee. The Best Options Broker at a Glance. Options are contracts that allow an investor the right, but not the obligation, to buy or sell an asset on or before a set date. Here’s an example: Say you are a buyer looking for a specific vintage car and you end up finding one you just have to have. When you find it, however, you know you won’t have any cash to buy it for another six months. You then negotiate with the owner to give you an option to buy the car in six months for a specific amount. If the owner agrees, you pay him a percentage up front for that option. The same scenario applies in the stock market – just for financial assets instead of vintage cars. If you were trading stocks, you’d be actually buying the car. Or, rather, not buying it since you didn’t have the money.

Because options are simply options and not promises, if something happened to that vintage car — say it was sitting in the driveway and a tree fell on it — you wouldn’t have to buy it. You’d still be out the price you paid for the options contract, but at least you wouldn’t have lost all that money on a now-worthless pile of steel. And, if in those same six months something happens that makes the car go up in value, well, hey, you’ve already locked in your price. If you’re new, you should prize learning tools. If you’re experienced, you’ll need to choose between low cost or amazing tools. No matter what, options trading shouldn’t be an afterthought tacked onto your platform. Best for Beginners. TD Ameritrade TD Ameritrade fees might be higher, but sometimes you get what you pay for. Consider your entire investment method. Don’t make your final decision solely based on options trading if it’s not the only kind of trading you’ll be doing. These online brokerage firms all offer a variety of investment opportunities. You may want to take into account their extra perks or the price of their mutual funds, for example. Know your expirations. Options are contracts that expire if they’re not acted on and an expired contract is worthless. Make sure you understand your expirations and set reminders using your broker’s platform, or on your calendar if you’re not trading every day.

We find the best of everything. How? We start with the world. We narrow down our list with expert insight and cut anything that doesn't meet our standards. We hand-test the finalists. Then, we name our top picks. Options Basics: What Are Options? Options are a type of derivative security. They are a derivative because the price of an option is intrinsically linked to the price of something else. Specifically, options are contracts that grant the right, but not the obligation to buy or sell an underlying asset at a set price on or before a certain date.

The right to buy is called a call option and the right to sell is a put option. People somewhat familiar with derivatives may not see an obvious difference between this definition and what a future or forward contract does. The answer is that futures or forwards confer both the right and obligation to buy or sell at some point in the future. For example, somebody short a futures contract for cattle is obliged to deliver physical cows to a buyer unless they close out their positions before expiration. An options contract does not carry the same obligation, which is precisely why it is called an “option.” Call and Put Options. A call option might be thought of as a deposit for a future purpose. For example, a land developer may want the right to purchase a vacant lot in the future, but will only want to exercise that right if certain zoning laws are put into place. The developer can buy a call option from the landowner to buy the lot at say $250,000 at any point in the next 3 years. Of course, the landowner will not grant such an option for free, the developer needs to contribute a down payment to lock in that right. With respect to options, this cost is known as the premium, and is the price of the options contract. In this example, the premium might be $6,000 that the developer pays the landowner. Two years have passed, and now the zoning has been approved the developer exercises his option and buys the land for $250,000 – even though the market value of that plot has doubled. In an alternative scenario, the zoning approval doesn’t come through until year 4, one year past the expiration of this option.

Now the developer must pay market price. In either case, the landowner keeps the $6,000. A put option, on the other hand, might be thought of as an insurance policy. Our land developer owns a large portfolio of blue chip stocks and is worried that there might be a recession within the next two years. He wants to be sure that if a bear market hits, his portfolio won’t lose more than 10% of its value. If the S&P 500 is currently trading at 2500, he can purchase a put option giving him the right to sell the index at 2250 at any point in the next two years. If in six months time the market crashes by 20%, 500 points in his portfolio, he has made 250 points by being able to sell the index at 2250 when it is trading at 2000 – a combined loss of just 10%. In fact, even if the market drops to zero, he will still only lose 10% given his put option. Again, purchasing the option will carry a cost (its premium) and if the market doesn’t drop during that period the premium is lost. These examples demonstrate a couple of very important points. First, when you buy an option, you have a right but not an obligation to do something with it. You can always let the expiration date go by, at which point the option becomes worthless. If this happens, however, you lose 100% of your investment, which is the money you used to pay for the option premium.

Second, an option is merely a contract that deals with an underlying asset. For this reason, options are derivatives. In this tutorial, the underlying asset will typically be a stock or stock index, but options are actively traded on all sorts of financial securities such as bonds, foreign currencies, commodities, and even other derivatives. Buying and Selling Calls and Puts: Four Cardinal Coordinates. Owning a call option gives you a long position in the market, and therefore the seller of a call option is a short position. Owning a put option gives you a short position in the market, and selling a put is a long position. Keeping these four straight is crucial as they relate to the four things you can do with options: buy calls sell calls buy puts and sell puts. People who buy options are called holders and those who sell options are called writers of options. Here is the important distinction between buyers and sellers: Call holders and put holders (buyers) are not obligated to buy or sell. They have the choice to exercise their rights if they choose.

This limits the risk of buyers of options, so that the most they can ever lose is the premium of their options. Call writers and put writers (sellers), however, are obligated to buy or sell. This means that a seller may be required to make good on a promise to buy or sell. It also implies that option sellers have unlimited risk , meaning that they can lose much more than the price of the options premium. Don't worry if this seems confusing – it is. For this reason we are going to look at options primarily from the point of view of the buyer. At this point, it is sufficient to understand that there are two sides of an options contract. To understand options, you'll also have to first know the terminology associated with the options market. The price at which an underlying stock can be purchased or sold is called the strike price. This is the price a stock price must go above (for calls) or go below (for puts) before a position can be exercised for a profit. All of this must occur before the expiration date. In our example above, the strike price for the S&P 500 put option was 2250. The expiration date, or expiry of an option is the exact date that the contract terminates. An option that is traded on a national options exchange such as the Chicago Board Options Exchange (CBOE) is known as a listed option. These have fixed strike prices and expiration dates.

Each listed option represents 100 shares of company stock (known as a contract). For call options, the option is said to be in-the-money if the share price is above the strike price. A put option is in-the-money when the share price is below the strike price. The amount by which an option is in-the-money is referred to as intrinsic value. An option is out-of-the-money if the price of the underlying remains below the strike price (for a call), or above the strike price (for a put). An option is at-the-money when the price of the underlying is on or very close to the strike price. As mentioned above, the total cost (the price) of an option is called the premium. This price is determined by factors including the stock price, strike price, time remaining until expiration (time value) and volatility. Because of all these factors, determining the premium of an option is complicated and largely beyond the scope of this tutorial, although we will discuss it briefly. Although employee stock options aren't available for just anyone to trade, this type of option could, in a way, be classified as a type of call option.

Many companies use stock options as a way to attract and to keep talented employees, especially management. They are similar to regular stock options in that the holder has the right but not the obligation to purchase company stock. The contract, however, exists only between the holder and the company and cannot typically be exchanged with anybody else, whereas a normal option is a contract between two parties that are completely unrelated to the company and can be traded freely. Options trading firms for not beginners pdf The Volatility Finder scans for stocks and ETFs with volatility characteristics that may forecast upcoming price movement, or may identify under - or over-valued options in relation to a security's near - and longer-term price history to identify potential buying or selling opportunities. Volatility Optimizer. The Volatility Optimizer is a suite of free and premium option analysis services and method tools including the IV Index, an Options Calculator, a Strategist Scanner, a Spread Scanner, a Volatility Ranker, and more to identify potential trading opportunities and analyze market moves. The Options Calculator powered by iVolatility. com is an educational tool intended to help individuals understand how options work and provides fair values and Greeks on any option using volatility data and delayed prices. Virtual Options Trading. The Virtual Trade Tool is a state-of-the-art tool designed to test your trading knowledge and lets you try new strategies or complex orders before putting your money on the line. The paperTRADE tool is an easy-to-use, simulated trading system with sophisticated features including what-if and risk analysis, performance charts, easy spread creation using spreadMAKER, and multiple drag and drop customizations. thinkorswim trade w advanced trading tools.

Open an account and get up to $600! New TradeStation Pricing. $5Trade + $0.50 Per Contract for Options. Open an Account. Trade free for 60 days on thinkorswim from TD Ameritrade. Cboe Global Markets' Exchanges Trading Schedule for Christmas and New Year's Holidays. *Third Party Advertisement *Third Party Advertisement. Legal & Other Links. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options (ODD). Copies of the ODD are available from your broker or from The Options Clearing Corporation, One North Wacker Drive, Suite 500, Chicago, Illinois 60606.

The information on this website is provided solely for general education and information purposes and therefore should not be considered complete, precise, or current. Many of the matters discussed are subject to detailed rules, regulations, and statutory provisions which should be referred to for additional detail and are subject to changes that may not be reflected in the website information. No statement within the website should be construed as a recommendation to buy or sell a security or to provide investment advice. The inclusion of non-Cboe advertisements on the website should not be construed as an endorsement or an indication of the value of any product, service, or website. The Terms and Conditions govern use of this website and use of this website will be deemed acceptance of those Terms and Conditions. 12 Specific Options Trading Courses Designed to Get You From Beginner to Professional. Learning with Option Alpha for only 30 minutes a day can teach you the skills needed to generate the income you’ve been dreaming about. Options Basics. Whether you are a completely new trader or an experienced trader, you'll still need to master the basics. The goal of this section is to help lay the groundwork for your education with some simple, yet important lessons surrounding options. Bullish Strategies. If the market is heading higher we'll show you how to create specific strategies that profit from up trending markets including low IV strategies like calendars, diagonals, covered calls and direction debit spreads. Options Expiration. Whether you are a completely new trader or an experienced trader, you'll still need to master the basics.

The goal of this section is to help lay the groundwork for your education with some simple, yet important lessons surrounding options. Professional Trading. Mindset is everything. The business of trading full-time or professionally only requires 2 things being consistent and persistent. In this bonus section we'll show you what it takes to make options trading an income machine. Entries & Exits. Teaching you the different option order types so that you can properly execute smarter option trades each day including market, limit and stop orders while highlighting some key tactics and tips you can use today. Neutral Strategies. You'll learn to love sideways markets because of the opportunity to build non-directional strategies that profit if the stock goes up, down or nowhere at all. This is how you learn make money trading in any market. Earnings Trades. When companies announce earnings each quarter we get a one-time volatility crush. And while most traders try to profit from a big move in either direction, you'll learn why selling options short-term is the best way to go. Real Case Studies. Detailed look at some of our best trades broken down by date, time, price so you can follow along step by step and learn in the process.

Everything from multiple iron condor adjustments to calendar rolls and earnings hedges. Portfolio Management. When I say "portfolio risk management" some people automatically assume you need a Masters from MIT to understand the concept and strategies - that is NOT the case. But you do need to use simple checks and balances. Bearish Strategies. Declining markets and higher IV gives traders like us an amazing opportunity to sell expensive options that decay in value. We'll cover our favorite strategies to profit even when stocks are falling like iron condors, strangles, etc. Pricing & Volatility. A complete and full understanding of how options are priced and where we get our "edge" as options traders using IV percentile. This section includes mastering implied volatility and premium pricing for specific strategies. Trade Adjustments. What happens when a trade goes bad? Do you roll out to the next month, move your strike prices, addremove one side or do nothing at all?

We'll give you concrete examples of how you can hedge different options strategies. "Looking for the rare breed of a service provider who under-promises and over-delivers? Well, you've found it here with Kirk and team. Actually, I need to amend that. Option Alpha promises big things and then delivers." "If you are even marginally interested in options, you have to checkout @OptionAlpha. Great site and video content. Very well done!" "I subscribed to Option Alpha just 6 weeks ago and it's litterally plug and play training . I just wish I could get back all those wasted hours trying to do this myself before I found you guys." - Dennis Ganster (Michigan) "This is awesome and simply to the point ! I stumbled onto the Option Alpha website earlier at work and came home dove right in. The training is incredible and easy to follow for someone like me. Thank god I found you!

" - Ramon Alvarez (Los Angeles) Join More Than 47,345 Members. Membership is always free & you can upgrade anytime to unlock our live trades. Introduction to Options Trading. Puts, calls, strike prices, premiums, derivatives, bear put spreads and bull call spreads — the jargon is just one of the complex aspects of options trading. But don’t let any of it scare you away. Options can provide flexibility for investors at every level and help them manage risk. To see if options trading has a place in your portfolio, here are the basics of what options are, why investors use them and how to get started. An option is a contract to buy or sell a stock, usually 100 shares of the stock per contract, at a pre-negotiated price and by a certain date. Just as you can buy a stock because you think the price will go up or short a stock when you think its price is going to drop, an option allows you to bet on which direction you think the price of a stock will go. But instead of buying or shorting the asset outright, when you buy an option you’re buying a contract that allows — but doesn’t obligate — you to do a number of things, including: Buy or sell shares of a stock at an agreed-upon price (the “strike price”) for a limited period of time. Sell the contract to another investor. Let the option contract expire and walk away without further financial obligation. Options trading may sound like it’s only for commitment-phobes, and it can be if you’re simply looking to capitalize on short-term price movements and trade in and out of contracts — which we don’t recommend. But options are useful for long-term buy-and-hold investors, too. Investors use options for different reasons, but the main advantages are: Buying an option requires a smaller initial outlay than buying the stock.

An option buys an investor time to see how things play out. An option protects investors from downside risk by locking in the price without the obligation to buy. If there’s a company you’ve had your eye on and you believe the stock price is going to rise, a “call” option gives you the right to purchase shares at a specified price at a later date. If your prediction pans out you get to buy the stock for less than it’s selling for on the open market. If it doesn’t, your financial losses are limited to the price of the contract. You also can limit your exposure to risk on stock positions you already have. Let’s say you own stock in a company but are worried about short-term volatility wiping out your investment gains. To hedge against losses, you can buy a “put” option that gives you the right to sell a particular number of shares at a predetermined price. If the share price does indeed tank, the option limits your losses, and the gains from selling help offset some of the financial hurt. How to start trading options. In order to trade options, you’ll need a broker.

Check out our detailed roundup of the best brokers for options traders, so you can compare commission costs, minimums, and more. Or stay here and answer a few questions to get a personalized recommendation on the best broker for your needs. More about options and trading. Here are some more of our articles on the ins and outs of trading options: Dayana Yochim is a staff writer at NerdWallet, a personal finance website: Email: dyochim@nerdwallet. com. Twitter: @DayanaYochim. This post has been updated. Options Trading 101. How to Trade Options. How to Trade Options.

Options trading can be complex, even more so than stock trading. When you buy a stock, you decide how many shares you want, and your broker fills the order at the prevailing market price or at a limit price. Trading options not only requires some of these elements, but also many others, including a more extensive process for opening an account. Indeed, before you can even get started you have to clear a few hurdles. Because of the amount of capital required and the complexity of predicting multiple moving parts, brokers need to know a bit more about a potential investor before awarding them a permission slip to start trading options. Opening an options trading account. Brokerage firms screen potential options traders to assess their trading experience, their understanding of the risks in options and their financial preparedness. Before you can start trading options, a broker will determine which trading level to assign to you. You’ll need to provide a prospective broker: Investment objectives such as income, growth, capital preservation or speculation Trading experience, including your knowledge of investing, how long you’ve been trading stocks or options, how many trades you make per year and the size of your trades Personal financial information, including liquid net worth (or investments easily sold for cash), annual income, total net worth and employment information The types of options you want to trade. Based on your answers, the broker assigns you an initial trading level (typically 1 to 4, though a fifth level is becoming more common) that is your key to placing certain types of options trades. Screening should go both ways.

The broker you choose to trade options with is your most important investing partner. Finding the broker that offers the tools, research, guidance and support you need is especially important for investors who are new to options trading. For more information on the best options brokers, read our detailed roundup to compares costs, minimums and other features. Or answer a few questions and get a recommendation of which ones are best for you. Consider the core elements in an options trade. When you take out an option, you’re purchasing a contract to buy or sell a stock, usually 100 shares of the stock per contract, at a pre-negotiated price by a certain date. In order to place the trade, you must make three strategic choices: Decide which direction you think the stock is going to move. Predict how high or low the stock price will move from its current price. Determine the time frame during which the stock is likely to move. 1. Decide which direction you think the stock is going to move. This determines what type of options contract you take on. If you think the price of a stock will rise, you’ll buy a call option.

A call option is a contract that gives you the right, but not the obligation, to buy a stock at a predetermined price (called the strike price) within a certain time period. If you think the price of a stock will decline, you’ll buy a put option. A put option gives you the right, but not the obligation, to sell shares at a stated price before the contract expires. 2. Predict how high or low the stock price will move from its current price. An option remains valuable only if the stock price closes the option’s expiration period “in the money.” That means either above or below the strike price. (For call options, it’s above the strike for puts it’s below the strike.) You’ll want to buy an option with a strike price that reflects where you predict the stock will be during the option’s lifetime. For example, if you believe the share price of a company currently trading for $100 is going to rise to $120 by some future date, you’d buy a call option with a strike price less than $120 (ideally a strike price no higher than $120 minus the cost of the option, so that the option remains profitable at $120). If the stock does indeed rise above the strike price, your option is in the money. Similarly, if you believe the company’s share price is going to dip to $80, you’d buy a put option (giving you the right to sell shares) with a strike price above $80 (ideally a strike price no lower than $80 minus the cost of the option, so that the option remains profitable at $80). If the stock drops below the strike price, your option is in the money. You can’t choose just any strike price. Option quotes, technically called option chains, contain a range of available strike prices. The increments between strike prices are standardized across the industry — for example, $1, $2.50, $5, $10 — and are based on the stock price.

The price you pay for an option has two components: intrinsic value and time value. The price you pay for an option, called the premium, has two components: intrinsic value and time value. Intrinsic value is the difference between the strike price and the share price, if the stock price is above the strike. Time value is whatever is left, and factors in how volatile the stock is, the time to expiration and interest rates, among other elements. For example, suppose you have a $100 call option while the stock costs $110. Let’s assume the option’s premium is $15. The intrinsic value is $10 ($110 minus $100), while time value is $5. This leads us to the final choice you need to make before buying an options contract. 3. Determine the time frame during which the stock is likely to move. Every options contract has an expiration date that indicates the last day you can exercise the option. Here, too, you can’t just pull a date out of thin air. Your choices are limited to the ones offered when you call up an option chain. Expiration dates can range from days to months to years. Daily and weekly options tend to be the riskiest and are reserved for seasoned option traders. For long-term investors, monthly and yearly expiration dates are preferable. Longer expirations give the stock more time to move and time for your investment thesis to play out.

A longer expiration is also useful because the option can retain time value, even if the stock trades below the strike price. An option’s time value decays as expiration approaches, and options buyers don’t want to watch their purchased options decline in value, potentially expiring worthless if the stock finishes below the strike price. If a trade has gone against them, they can usually still sell any time value remaining on the option — and this is more likely if the option contract is longer. More about the types of options trades. Find the best broker for options traders. Dig into options trading strategies. Learn the essential options trading terms. James F. Royal, Ph. D., and Dayana Yochim are staff writers at NerdWallet, a personal finance website. Email: jroyal@nerdwallet. com, dyochim@nerdwallet. com. Twitter: @JimRoyalPhD, @DayanaYochim. This post has been updated. Options Trading 101.

5 Tips for Choosing an Options Broker. 5 Tips for Choosing an Options Broker. Options trading can be complicated. But if you choose your options broker with care, you’ll quickly master how to conduct research, place trades and track positions. Here’s our advice on finding a broker that offers the service and the account features that best serve your options trading needs. 1. Look for a free education. If you’re new to options trading or want to expand your trading strategies, finding a broker that has resources for educating customers is a must. That education can come in many forms, including: Online options trading courses. Live or recorded webinars. One-on-one guidance online or by phone Face-to-face meetings with a larger broker that has branches across the country. It’s a good idea to spend a while in student-driver mode and soak up as much education and advice as you can. Even better, if a broker offers a simulated version of its options trading platform, test-drive the process with a paper trading account before putting any real money on the line.

2. Put your broker’s customer service to the test. Reliable customer service should be a high priority, particularly for newer options traders. It’s also important for those who are switching brokers or conducting complex trades they may need help with. Consider what kind of contact you prefer. Live online chat? Email? Phone support? Does the broker have a dedicated trading desk on call? What hours is it staffed? Is technical support available 247 or only weekdays? What about representatives who can answer questions about your account?

Even before you apply for an account, reach out and ask some questions to see if the answers and response time are satisfactory. 3. Make sure the trading platform is easy to use. Options trading platforms come in all shapes and sizes. They can be web - or software-based, desktop or online only, have separate platforms for basic and advanced trading, offer full or partial mobile functionality, or some combination of the above. Visit a broker’s website and look for a guided tour of its platform and tools. Screenshots and video tutorials are nice, but trying out a broker’s simulated trading platform, if it has one, will give you the best sense of whether the broker is a good fit. Some things to consider: Is the platform design user-friendly or do you have to hunt and peck to find what you need? How easy is it to place a trade? Can the platform do the things you need, like creating alerts based on specific criteria or letting you fill out a trade ticket in advance to submit later? Will you need mobile access to the full suite of services when you’re on the go, or will a pared-down version of the platform suffice? How reliable is the website, and how speedily are orders executed?

This is a high priority if your method involves quickly entering and exiting positions. Does the broker charge a monthly or annual platform fee? If so, are there ways to get the fee waived, such as keeping a minimum account balance or conducting a certain number of trades during a specific period? 4. Assess the breadth, depth and cost of data and tools. Data and research are an options trader’s lifeblood. Some of the basics to look for: A frequently updated quotes feed. Basic charting to help pick your entry and exit points. The ability to analyze a trade’s potential risks and rewards (maximum upside and maximum downside). Screening tools. Those venturing into more advanced trading strategies may need deeper analytical and trade modeling tools, such as customizable screeners the ability to build, test, track and back-test trading strategies and real-time market data from multiple providers. Check to see if the fancy stuff costs extra. For example, most brokers provide free delayed quotes, lagging 20 minutes behind market data, but charge a fee for a real-time feed. Similarly, some pro-level tools may be available only to customers who meet monthly or quarterly trading activity or account balance minimums. 5. Don’t weigh the price of commissions too heavily.

There’s a reason commission costs are lower on our list. Price isn’t everything, and it’s certainly not as important as the other items we’ve covered. But because commissions provide a convenient side-by-side comparison, they often are the first things people look at when picking an options broker. A few things to know about how much brokers charge to trade options: The two components of an options trading commission are the base rate — essentially the same as thing as the trading commission that investors pay when they buy a stock — and the per-contract fee. Commissions typically range from $3 to $9.99 per trade contract fees run from 15 cents to $1.25 or more. Some brokers bundle the trading commission and the per-contract fee into a single flat fee. Some brokers also offer discounted commissions based on trading frequency, volume or average account balance. The definition of “high volume” or “active trader” varies by brokerage. If you’re new to options trading or use the method only sparingly you’ll be well-served by choosing either a broker that offers a single flat rate to trade or one that charges a commission plus per-contract fee. If you’re a more active trader, you should review your trading cadence to see if a tiered pricing plan would save you money.

Of course, the less you pay in fees the more profit you keep. But let’s put things in perspective: Platform fees, data fees, inactivity fees and fill-in-the-blank fees can easily cancel out the savings you might get from going with a broker that charges a few bucks less for commissions. There’s another potential problem if you base your decision solely on commissions. Discount brokers can charge rock-bottom prices because they provide only bare-bones platforms or tack on extra fees for data and tools. On the other hand, at some of the larger, more established brokers you’ll pay higher commissions, but in exchange you get free access to all the information you need to perform due diligence. Dayana Yochim is a staff writer at NerdWallet, a personal finance website: Email: dyochim@nerdwallet. com. Twitter: @DayanaYochim. Disclaimer: NerdWallet has entered into referral and advertising arrangements with certain broker-dealers under which we receive compensation (in the form of flat fees per qualifying action) when you click on links to our partner broker-dealers andor submit an application or get approved for a brokerage account. At times, we may receive incentives (such as an increase in the flat fee) depending on how many users click on links to the broker-dealer and complete a qualifying action. Getting your feet wet.

Without getting in up to your you-know-what. Option trading is more complicated than trading stock. And for a first-timer, it can be a little intimidating. That&rsquos why many investors decide to begin trading options by buying short-term calls. Especially out-of-the-money calls (strike price above the stock price), since they seem to follow a familiar pattern: buy low, sell high. Educational videos and webinars. Just getting started? Watch our first-class video content in the comfort of your home. Go » But for most investors, buying out-of-the-money short-term calls is probably not the best way to start trading options. Let&rsquos look at an example of why. Imagine you&rsquore bullish on stock XYZ, trading at $50. As a beginning option trader, you might be tempted to buy calls 30 days from expiration with a strike price of $55, at a cost of $0.15, or $15 per contract. Why?

Because you can buy a lot of them. Let&rsquos do the math. (And remember, one option contract usually equals 100 shares.) Call option risk profile. When you buy a call option with a strike price of $55 at a cost of $0.15, and the stock currently trading at $50, you need the stock price to rise $5.15 before your options expire in order to break even. That&rsquos a pretty significant rise in a short time. And that kind of move can be very difficult to predict. Purchasing 100 shares of XYZ at $50 would cost $5000. But for the same $5000, you could buy 333 contracts of $55 calls, and control 33,300 shares. Holy smokes. Imagine XYZ hits $56 within the next 30 days, and the $55 call trades at $1.05 just prior to expiration.

You&rsquod make $29,921.10 in a month ($34,965 sale price minus $4,995 initially paid minus $48.90 Ally Invest commissions). At first glance, that kind of leverage is very attractive indeed. All that glitters isn't a golden options trade. One of the problems with short-term, out-of-the-money calls is that you not only have to be right about the direction the stock moves, but you also have to be right about the timing. That ratchets up the degree of difficulty. Furthermore, to make a profit, the stock doesn&rsquot merely need to go past the strike price within a predetermined period of time. It needs to go past the strike price plus the cost of the option. In the case of the $55 call on stock XYZ, you&rsquod need the stock to reach $55.15 within 30 days just to break even. And that doesn&rsquot even factor in commissions or taxes. In essence, you&rsquore asking the stock to move more than 10% in less than a month. How many stocks are likely to do that? The answer you&rsquore looking for is, &ldquoNot many.

&rdquo In all probability, the stock won&rsquot reach the strike price, and the options will expire worthless. So in order to make money on an out-of-the-money call, you either need to outwit the market, or get plain lucky. Being close means no cigar. Imagine the stock rose to $54 during the 30 days of your option&rsquos lifetime. You were right about the direction the stock moved. But since you were wrong about how far it would go within a specific time frame, you&rsquod lose your entire investment. If you&rsquod simply bought 100 shares of XYZ at $50, you&rsquod be up $400 (minus Ally Invest commission of $4.95). Even if your forecast was wrong and XYZ went down in price, it would most likely still be worth a significant portion of your initial investment. So the moral of the story is: Don&rsquot get suckered in by the leverage you get from buying boatloads of short-term, out-of-the-money calls. Hey, don't get us wrong. On the other hand, don&rsquot get the false impression that you should avoid calls altogether &mdash this site outlines several ways to use them. In fact, this section alone includes three plays for beginners to get their feet wet, and two of them do involve calls. These strategies are: The reason we chose these strategies is because they&rsquore designed to enhance your stock portfolio. For now, rookies should aim for a balance between trading stocks and using options when you feel it&rsquos appropriate. Getting Your Feet Wet Writing Covered Calls Buying LEAPS Calls as a. Stock Substitute Selling Cash-Secured Puts on Stock You.

Want to Buy Five Mistakes to Avoid When. Learn trading tips & strategies. from Ally Invest&rsquos experts. Options involve risk and are not suitable for all investors. For more information, please review the Characteristics and Risks of Standardized Options brochure before you begin trading options. Options investors may lose the entire amount of their investment in a relatively short period of time. Multiple leg options strategies involve additional risks, and may result in complex tax treatments. Please consult a tax professional prior to implementing these strategies. Implied volatility represents the consensus of the marketplace as to the future level of stock price volatility or the probability of reaching a specific price point. The Greeks represent the consensus of the marketplace as to how the option will react to changes in certain variables associated with the pricing of an option contract. There is no guarantee that the forecasts of implied volatility or the Greeks will be correct. Ally Invest provides self-directed investors with discount brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice. System response and access times may vary due to market conditions, system performance, and other factors.

You alone are responsible for evaluating the merits and risks associated with the use of Ally InvestЂ™s systems, services or products. Content, research, tools, and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment method. The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, are not guaranteed for accuracy or completeness, do not reflect actual investment results and are not guarantees of future results. All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns. Securities offered through Ally Invest Securities, LLC. Member FINRA and SIPC. Ally Invest Securities, LLC is a wholly owned subsidiary of Ally Financial Inc. Trading Options For Dummies Cheat Sheet. Trading options is a bit different from trading stocks, but they both require research and study. If you’re going to trade options, it’s important that you know order types, how to read changes in the market with charts, how to recognize how stock changes affect indexes and options, and how indexes are built. A variety of order types are available to you when trading stocks some guarantee execution, others guarantee price. This brief list describes popular types of trading orders and some of the trading terminology you need to know. Market order: A market order is one that guarantees execution at the current market for the order given its priority in the trading queue (a. k.a., trading book) and the depth of the market.

Limit order: A limit order is one that guarantees price, but not execution. When placing a limit on an order, it will be treated like a market order if: When buying, your limit is at or above the current market ask price and there are sufficient contracts to satisfy your order (for example, limit to buy at $2.50 when the asking price is $2.50 or lower). When selling, your limit is at or below the current market bid price and there are sufficient contracts to satisfy your order (for example, limit to buy at $2.50 when the asking price is $2.50 or higher). Stop order: A stop order, also referred to as a stop-loss order , is your risk management tool for trading with discipline. A stop is used to trigger a market order if the option price trades or moves to a certain level: the stop. The stop represents a price less favorable than the current market and is typically used to minimize losses for an existing position. Stop-limit order: A stop-limit order is similar to a regular stop order, but it triggers a limit order instead of market order. While this may sound really appealing, you’re kind of asking a lot in terms of the specific market movement that needs to take place. It may prevent you from exiting an order you need to exit, subjecting you to additional risk. If the stop gets reached, the market is going against you. Duration: The two primary periods of time your order will be in place are. The current trading session or following session if the market is closed.

Until the order is cancelled by you, or the broker clears the order (possibly in 60 days — check with your broker) Cancel or change: If you want to cancel an active order, you do so by submitting a cancel order. Once the instructions are completed, you receive a report notifying you that the order was successfully canceled. It’s possible for the order to already have been executed, in which case you receive a report indicating that you were too late to cancel, filled with the execution details. Needless to say, you can’t cancel a market order. Changing an order is a little different than canceling one because you can change an order one of two ways: Cancel the original order, wait for the report confirming the cancellation, and then enter a new order. Submit a cancelchange or replace order, which replaces the existing order with the revised qualifiers unless the original order was already executed. If that happens, the replacement order is canceled. Charts Used for Tracking Investments. Price data is used in charts to give you a view of market trading activity for a certain period. The following list gives you the lowdown on some of the chart types you might encounter while you track your investments: Line chart: This chart uses price versus time. Single price data points for each period are connected using a line. This chart typically uses closing value.

Line charts provide great “big picture” information for price movement and trends by filtering out the noise from the period’s range data. One advantage to line charts is that more minor moves are filtered out. A disadvantage to line charts is that they provide no information about the strength of trading during the day or whether gaps occurred from one period to the next. Open-High-Low-Close (OHLC) bar chart: This chart uses price versus time. The period’s trading range (low to high) is displayed as a vertical line with opening prices displayed as a horizontal tab on the left side of the range bar and closing prices as a horizontal tab on the right side of the range bar. A total of four price points are used to construct each bar. OHLC charts provide information about both trading period strength and price gaps. Using a daily chart as a point of reference, a relatively long vertical bar tells you the price range was pretty big for the day. Candlestick chart: This chart uses price versus time, similar to an OHLC chart with the price range between the open and the close for the period highlighted by a thickened bar. Patterns unique to this chart can enhance daily analysis.

Candlestick charts have distinct pattern interpretations regarding the battle between bulls and bears that are best applied to a daily chart. They also incorporate inter-period data to display price ranges and gaps. How Financial Indexes Are Constructed. To help understand financial index changes, you should know how indexes are built. Indexes are not created equal (well . . . one is). Financial indexes are constructed in three different ways: Price-weighted: Favors higher-priced stocks. Market cap-weighted: Favors higher-cap stocks. Equal dollar-weighted: Each stock has same impact. How Changing Stock Affects Indexes. A financial index is a measuring tool of prices for groups of stocks, bonds, or commodities.

A change in one stock translates into index changes. Some examples are: When a high-priced stock declines in a price-weighted index, it leads to bigger moves down in an index when compared to declines in a lower-priced stock. The Dow is an example of a price-weighted index that is affected more by Boeing (trading near $100) than Pfizer (trading near $25). A market-cap weighted index, such as the S&P 500, is impacted more by higher market capitalization stocks regardless of price. Even though Microsoft may only be trading at $30 per share, its market cap is huge — about $290 billion. When it moves up or down it creates a greater change in the S&P 500 than, say, Amgen, which trades at $55 per share, but only has a market cap of approximately $64 billion. All of the stocks in an equal-dollar weighted index should have the same impact on the index value. In order to keep the index balanced, a quarterly adjustment of the stocks is required. This prevents a stock that has seen large gains over the last three months from having too much weight on the index.