You may have made some money buying and selling shares on the stock market, but have you ever wanted to learn how to buy stock options? While the concept of stock trading is not new, the idea of buying and selling stock options is less familiar. Options trading can be far more complex than trading normal stocks, although it tends to require less financial commitment upfront, which can be a safer bet for beginners.
Although it can be difficult to master, it’s relatively easy to get started with options trading. In this article, we’ll cover different strategies for getting started and share a few tricks about how you can make money on your options investment.
Tips on How to Buy Stock Options
1. Understand the Difference Between Stock Options and Normal Stocks
If you’re just learning the ropes of how to buy stock options, it’s important to know the difference between stock options and normal stocks. When you purchase stock, you’ve actually purchased part of the company. This makes you a shareholder, and your share price will fluctuate depending on the success of the company.
Stock options are quite different. Instead of owning part of the company, you’ve signed a contract saying that by a certain date (commonly referred to as the expiration date), you will either buy or sell the stock. So technically, you are just purchasing the ability to buy in the future. Options are generally cheaper and far less risky than buying stocks themselves.
2. Develop an Options Trading Strategy
Developing a trading strategy is important if you’re planning to make any sort of return on your investment. Depending on your goal and how much you’re willing to risk, there are a few strategies we can recommend to first-time traders.
One popular strategy is the LONG CALL STRATEGY which bets that the share will increase in value the longer you hold onto it. If the market price increases past the strike price, then you can buy it for the pre-determined price and make a profit. If you’re planning on selling the option, then you might look at the short put option strategy.
It’s a good idea to research different trading methods and to determine which one is the best fit for your style of trading.
3. Never Stop Analyzing
One of the key tips to success to being aware of what is happening with your options. Prices can change within an instant, and you won’t want to miss out on a sale because you were unaware that the price of your options had dropped or increased.
To help you stay organized, we recommend tracking your options with a trading tool such as TradeStation or Atom Finance. Their Optionstation Pro product allows you to analyze, research, and even trade directly into the market. If you’re only dealing with one or two contracts, you might be able to keep an eye on everything using an excel-based program, like MarketXLS.
4. Pay Attention to Time Decay
In some cases, the longer you hold onto an option, the lower the value the option will have. This is called time decay, and it can have a detrimental impact on your portfolio if you don’t understand how the options trading process works.
For this reason, you should concentrate more on selling that option, rather than buying it. If you’re looking for more advice on how to deal with time decay, we recommend talking with the folks at ForexMentor. They’re on hand to work with aspiring traders and to equip them with the knowledge and skills for making the most out of their investment.
5. Don’t Bite Off More Than You Can Chew
If you see a great return on your investment, it might be tempting to throw more money into potential options. But until you get more experienced in how to buy stock options, we recommend sticking to just a couple of contracts until you learn about the entire buying and selling process. Although options trading is less risky and stock trading – it’s still a gamble! So, take your time and understand the process before you invest a lot of money upfront.
As we mentioned, trading options can be extremely complicated, especially if you’ve never learned how to trade stock options or shares in the past. For more information and advice on how to profit from your investment portfolio, check out our article on investing stocks for beginners and which top-rated finance courses you should take. You may also enjoy reading our list of the best stock trading apps.
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