How to Trade Options

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How to Trade Options in 5 Easy Steps

If you are really keen to discover how to trade options. let me encourage you that it is not as difficult as you might think. Most importantly, dont over-complicate the process. Heres 5 steps you can get started on today. The quicker you make it to step 4 the better. In my personal opinion, you should spend at least 6 to 12 weeks on Step 4 the most important part of your journey to becoming a successful options trader.

STEP 1. Know the Basics.

This is a simple as understanding the difference between a put and a call option and knowing your rights/obligations as a buyer/seller of each. Go to your local stock exchange website and download their options leaflet (most exchanges provide them for free online as a PDF file.) Give it a thorough reading. Make sure you get your head around the following key concepts:

* If share price increases, call-option price increases.

* If share price drops, put-option price increases.

* You can trade options by buying and selling the options themselves as their value changes in response to the price changes of the underlying security.

* If you buy a call you are purchasing the right to buy the underlying security at the option strike price. So, you have the right (but not the obligation) to exercise the call (that is you can BUY the underlying security at the option strike price).

* If you sell a call you are selling the right to buy the underlying security at the option strike price. If the buying 3rd party exercises this right, you will be forced to SELL to them at the option strike price (especially if the market price is higher than the strike).

* If you buy a put you are purchasing the right to sell the underlying security at the option strike price. So, you have the right (but not the obligation) to exercise the put (that is you can SELL the underlying security at the options strike price).

* If you sell a put you are selling the right to sell the underlying security at the option strike price. If the buying 3rd party exercises this right, you will be forced to BUY from them at the option strike price (especially if the market price is lower than the strike).

Once you really understand those points, you can improve your knowledge of options by reading books on the topic as well as spending a lot of time on Step 4 (paper trading).

STEP 2. Research and adopt a strategy that works for you.

The strategy you choose will depend on many factors, including your tolerance for risk, your starting bank, your available trading hours, etc. For me personally, I trade the Australian Stock Exchange ASX Equity Options. These options are traded for 6 hours per day, 5 days a week. Its good to note that no matter where you are in the world you can also trade the ASX. In fact, if youre on the other side of the world, you might find that the ASX hours allows you to trade in the evenings.

I also choose to day trade options rather than hold them overnight. That way I know my money is safe in the bank overnight and theres no need to worry about major gap downs or gap ups in the morning.

When deciding how to trade options, make sure your strategy gives you clearly defined entry and exit signals and that there it is built on good money-management.

STEP 3. Choose a broker.

Most online brokers these days provide fantastic options trading facilities. Simply choose the most convenient for you. In my opinion, it is vital for you to have online intra-day charts. Make sure your broker has some sort of charting software you can use to draw trend lines and examine your charts. If youd like to see exactly the broker I use, then check out the free report you can access to the right of this article.

STEP 4. Paper trade your strategy.

Once you have a solid strategy, get stuck into paper trading (i.e. practice trading with numbers, but not real money). When youre just starting out, its OK to do some backtesting using charts outside of market hours. But sooner or later you will need to trade LIVE, during real market hours but youll also need restraint NOT to put real money on your trades. This is where the rubber meets the road where you will really discover how to trade options! When paper-trading a new strategy, I like to perform every single step as if it were real even to the point of entering my order into my broking platform (except I dont actually click confirm.). You need to make it as real as possible. This will help you build trust in your system and to take inevitable losses as just part of the business. Youll also learn to think quickly when it counts!

STEP 5. Go live.

The most exciting step will be to place your first trade! Always start small just one or two contracts. Sometimes 1 or 2 contracts will result in a small loss after brokerage, but thats not the point. The point is for you to experience placing a real order in your trading software. Once you feel comfortable with your system, then go ahead and start trading full sized trades and building your equity curve!

And remember, if your first trade is a loss, dont throw in the towel. Take a good look at your paper-trading records for encouragement. After all, youll only ever trade live if your paper-trading shows real profits in spite of regular losses. This game is all about letting profits run, stopping losses short and a better than 50-50 win/loss ratio.

If you want a jump start on how to trade options for massive profit, please accept my free gift from this website the Trading Room Spy report youll like what you see! Discover how it can really work for you!

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