How do you trade options?

Question

How do you trade options?

Answer 1

You can trade options through a stock broker. Try one of the on-line brokers.

Interactive Broker has very low fees for trading options.

http://www.amazon.com/gp/richpub/listman...

Answer 2

Here is the simple step-by-step on how to trade options safely and profitable.

1. Firstly, you need to find a good charting package, so you can track the price of shares in a visual way. These days, a good broker will provide this, but if you're stuck, there are free versions out there.

2. The most important tool you'll then need, is the ability to draw parallel lines. This way, you can tell when a stock is "channeling". These channels can either be ascending, horizontal or descending. Ascending or descending channels will have differing slopes. Not all stocks channel, but many do. Find these.

3. The other thing you need to do, is to be able to draw horizontal lines that mark out "support" and "resistance" levels - where a stock has broken through or settled upon a given price mark.

4. From there, you look for shares that have options on them. Not all shares do, so you need to know these. Your broker, or stock exchange can provide you this information

5. You also need to be able to compare "daily" and "weekly" charts, to determine where a stock currently is in it's longer term direction. Draw parallel lines, if applicable, over the weekly charts.

6. From here, it is simply a matter of determining where a stock currently is within the channel. You may even have a "channel within a channel". You need to first determine the strength (slope) of the larger channel, then you can tell the reliability of the more immediate channel to "do it's thing".

7. If the channel is telling you the stock should rise, you want to buy call options with at least 45 days till expiry. If the signals are telling you the stock should fall, then you buy put options. The best places to buy are at the tops or bottoms of channels, but first wait for the "bounce" to validate your expectations. If the stock breaks through the channel, take an opposite position.

8. Options provide you with far more leverage than shares and are far safer than CFDs to trade. They give you the flexibility of holding an "each way" position if you like, because you can hold both call and put options for the same strike price and expiry date, or any variation thereof, at the same time.

9. Therefore your profits will be far greater than if you owned the stock and with much less capital risk. http://www.optionsuniversityblog.com

Answer 3

I personally use options in 4 ways:

1.  Instead of buying a stock that I want to own outright, I'll sell a put instead.  I either get the stock at a discount at what it is today, or keep my margin money and earn a nice monthly return.

2.  I'll sell covered calls on stock positions I own at strikes where I'd be willing to sell them.

3.  I use the "risk" portion of my portfolio to sell spreads.  Usually market-neutral positions like calendar spreads & iron condors.  Once in a great while I'll take a directional position if I feel strongly about something.

4.  I occasionally will buy an out-of-the-money option if I anticipate a strong move.  I'm not sure why I continue to do so - I've had a couple big wins but many complete losses.  For consistent income, options are a seller's game.

I'd use other strategies if I could devote more time to it.  And/or devote more capital to strategy #3.  With what I do I usually don't check up on my positions more than once a week.  For #3 above I do arrange to be alerted in case the underlying moves against my position.

Answer 4

There are two ways to interpret that question.

The first way is to take the question literally and discuss the approach that I personally use when trading options.

The second way is to take it more generally and discuss the steps associated with preparing for and making an options trade.

I'll try to cover both in one answer.

Before trading options you should get a good eductaion on the subject. Two excellent free web resources to get you started are

http://www.cboe.com/LearnCenter/default....

and

http://www.optionseducation.org/

I do not believe either of these will provided you with enough information to be able to trade profitably most of the time, but I think they will give you enough background to be able to pick out a good book on options trading to read. I believe reading at least one good book on options trading is critical.

Once you have a good understanding you options strategies and trading, you look for trading opportunities. Some people use mechanical options screeners or stock screeners. These are usually people who have picked out a strategy they want to use, who then look for situations where the strategy appears attractive.

I prefer to look at existing situations and see if there is a strategy that looks attractive based on the situation. Like most people, I have a handfull of stocks I follow and I am more likely to place on trade on one of those stocks.

Although it appears many people make options trades based almost entirely on their projection for changes in the price of the underlying, I am convinced almost all successful options traders base their trades on projections of volatility in the price of the underlying at least as much as the direction of the price.

Once I have chosen a trade that looks attractive, I make a tentative plan on how I will manage the trade after I open it. For example, for a given trade I may plan

o To adjust the spread if the delta risk gets over 300 or under -300

o Under what conditions I will close the trade early

o How to handle scheduled events, such as earnings releases, before expiry.

As for actually entering the option order, you need a brokerage account that is approved to trade options. Most brokerages have different option trading levels approval. A low approval level may only allow you to sell covered calls or buy long option positions. A moderate approval level may also allow you to trade spreads. Usually you need the highest level to write naked calls.

As well as normal limit orders and market orders, you can also use spread orders for options trades. An example of a spread order would be

Buy 10 January 2009 $40 strike calls on XYZ

Sell 10 October 2008 $50 strike calls on XYZ

for a total debit of $12.10 or less per pair.

If filled, this order would cost up to $12,100 ($12.10 x 100 x 10) to fill.

Most people agree that it is better to use a spread order when possible.

You can find examples of some of the trades I have done, including all adjustments and final results, on the Yahoo Options Trades/Trade Recomendations message board. Some examples include

http://messages.yahoo.com/Business_%26_F...

http://messages.yahoo.com/Business_%26_F...

and

http://messages.yahoo.com/Business_%26_F...

(Note: Beware of "imposters" on that message board.)

Answer 5

The lowest risk option trading is to do a box conversion, and this is a combination of a bull call debit spread overlaid with a bear put debit spread. I usually execute these spreads in the S$P 500 index options. The trick of it is in the order placement, and not to pay more than $2500 for a 20 point window. At the end of the transaction, you're guaranteed to get back your $2500 or up to $5000 or somewhere in between. But I like the idea of not having to risk any money after all the positions have filled. These should be executed in the front month, quickest expiration so you can rollover your money.  As a broker, I have to disclose you can lose all or more of your money if you listen to me. <my disclosure>

Answer 6

Very carefully.  I do mostly Verticals myself. I subscribe to a service that does Iron Condors & Calendar spreads. They trade automatically via my brokerage account.

http://www.redoption.com/

I also attended a good free seminar on Options last month;

http://www.optionplanet.com/

Be very careful.... unless you're on top of the Greeks.... you can lose money very fast.  This includes option "services".  When things go bad in Options..... they really go bad.

Good luck!