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The Basics of Vanilla Options Trading. When buying an option – whether a put or a call – the trader pays the upfront premium from his account’s cash balance, and his potential earnings are limitless.

A put option is the opposite. You're purchasing the right to sell an asset, which would be useful if you thought the price of that asset would drop before a given date. That's the basic process for trading options, though in practice it is very complex and extremely risky.

If you're interested in this high-risk investment, make sure you take the time to educate yourself and only invest with risk capital. Lewis on September 18, Know what options are. Options are contracts that confer to their holder the right to buy or sell an underlying security at a set price the "strike price" within a set time period the "term".

The strike price may be lower or higher than the current price of the underlying security the "market price". An option, just like a stock or bond, is a security. While an option allows one to leverage their cash an option controls a greater value of stock , it is high risk because it eventually expires. Understand the risks of options trading. Options can be purchased speculatively or as a hedge against losses. Speculative purchases allow traders to make a large amount of money, but only if they can correctly predict the magnitude, timing, and direction of the underlying security's price movement.

This also opens up these traders to large losses and high trade commissions. This makes trading options risky, especially for novice traders. However, options can also be used as a strategy for protecting your investments. For example, you could purchase a put option to sell your shares of a stock if you are worried that the price might drop suddenly. This method of using options is somewhat safe, as you only stand to lose the contract price.

Read and understand the booklet entitled "Characteristics and Risks of Standardized Options. Brokerage firms distribute the booklet to those who open an options-trading account. In that book, you'll learn more about options terminology, the various types of options that you can trade, exercising and settling options, tax considerations for options traders, and the risks associated with options trading.

Understand the basic types of trades. There are two major types of options trades: Both represent the right to either buy or sell a security at a certain price within a defined time period. Specifically, the two types are: A "call" is the option or right, but not the obligation, to buy an asset at a certain price within a specific period of time. The purchaser of a call expects the price of the underlying stock to rise during the term of the option.

Otherwise the buyer would loose the cost of the call bid. The purchaser of a put expects the price of the underlying stock to fall during the term of the option. In this case, the buyer can force the writer seller of the put option contract to buy the asset at the preset rate. You can open a position with the purchase or sale of a call or put, close it by taking the contrary action, exercise it, or let it expire. Learn to talk the talk.

Look up options-trading terminology, organize the terms in a spreadsheet, print them out and start studying.

Here are some very basic terms: A "holder" is someone who has bought an option. A "writer" is someone who has sold an option. A "strike price" is the price at which the asset will be bought or sold depending on whether it's a call or a put.

This is the price a stock price must go above for calls or go below for puts before a option can turn a profit. The "expiration date" is the agreed upon date by which the owner of the option must exercise his right to buy or sell the underlying security. After this date is reached, the option expires and the holder loses his right. Open a brokerage account. If you want to trade options, you're going to need to open a brokerage to enter your transactions — this can be online with sites like www.

Be sure that you understand what's involved in opening a brokerage account before doing so. Some firms even offer no commissions on options trading. Do some online research and read reviews of the brokerage companies that are on your short list. Learn from other people's mistakes so that you don't have to repeat them. Watch out for scam trading sites and platforms.

Always research a platform thoroughly before depositing any money. Avoid platforms with negative reviews or reported fraudulent activity. A cash account will only allow purchases of options to open a position. Or if you are simply new to trading options online then you may wish to get all of the free options education that you can and then start practicing your options trading strategies online before you ever jump in feet first!

If you need to exercise your company stock options please give us a call today at PLACE or We may have cheap options commissions but don't get fooled into thinking that you only get what you pay for!

We are known for our Ritz Carlton style client service and we have the access and experience to handle all of your full-service investment needs as well. Compare our Commission Rates vs. Do Option Commission Charges Vary? Margin Requirements for US Options. Options Pricing Calculator Widget. Margin Requirements - Canadian Options. Get an idea of some of the investment offerings at Place Trade by checking out the links below:.

Open an Online Trading Account. Do Options Commissions Vary? How to Exercise Options. FAQs - Options Expiration. Margin - US Options. Margin - Canadian Options. Write and Roll Options. Compare our Commission Rates. Options involve risk and are not suitable for all investors. We offer all the Products and Services you need to build your portfolio and take charge of your investments. Alternatively, a trader can buy an option further out of the money, thus completely limiting his potential exposure.

When buying options there is limited risk; the most that can be lost is what was spent on the premium. If selling options — a great way to generate income — the trader acts like an insurance company, offering someone else protection on the position.

The premium is collected, and if the market reacts according to the speculation, the trader keeps the profits he made from taking that risk. If wrong, it is not much different than being wrong on a regular spot trade. In either case, the trader is exposed to unlimited downside, and therefore can close out the position with stoploss orders, for example , but with options the trader will have earned the premium, a real advantage vs spot trading.

The trader speculates it will rise within the week. In the first case scenario he will open a spot position for 10, units, on any platform at the given spreads. In the second strategy, he buys a call option with one week to expiration at a strike price, for example, of 1.

Once buying he pays the premium as shown in the trading platform, for example, 0. His breakeven level will be the strike price plus the premium he paid up front. He can also profit at any time prior to expiration due to an increase in implied volatility or a move higher in the EURUSD rate. The higher it goes, the more he can make. For example, if at expiration the pair is trading at 1. On the other hand, if spot is below the strike at expiration, his loss will be the premium he paid, 50 pips, and no more.

In the third case, he will sell a put option. Meaning he will act as the seller, and receive the premium directly to his account. The risk he takes by selling an option is that he is wrong about the market — and so he must be careful in choosing the strike price.

In return for taking this risk, the option seller receives the upfront premium. If spot finishes higher than the strike price, he keeps the premium and is free to sell another put, adding to his income earned from the first trade.

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A similar strategy is the "strip," which is like the straddle, but is a "bearish" strategy with double the earning power on a downward price movement.

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While an option allows one to leverage their cash an option controls a greater value of stock , it is high risk because it eventually expires. Customers wishing to engage in transactions involving option contracts must obtain pre-approval by a Place Trade Financial Registered Options Principal.

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