How to Trade Options

Table of Contents
Chapter 1: Introduction to Options Trading
Chapter 2: Options Trading Terminology
Chapter 3: Option Trading Strategies
Chapter 4: Types of Options Trading
Chapter 5: Common Applications of Options Trading
Chapter 6: How to Trade Options

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Chapter 6: How to Trade Options
Where to Find Pricing Data
How to Buy and Sell Options

Chapter 6: How to Trade Options

There are many options products available in the market, with varying degrees of complexity to suit both novice investors and market experts. To carry out successful trades or to exercise your options at the right time it is necessary to track the option regularly, for which you’ll need to understand how to read an options table.

An options table gives you all the data you need to assess the current state of your investment in the option. Although this table can appear very complex and confusing to a new investor, a few basic tips can help demystify the data.

The basic data to note in the table is the symbol of the underlying stock, the contract month, the strike price (at which you can transact) and the letter ‘C’ to denote a call option or letter ‘P’ to denote a put option. The table will also have the bid price or ask price. The bid price is the price at which you can sell your option on that particular date. The ask price is what you pay for the option if you buy it on that day.

The volume column shows how much trade took place with that particular option. The greater the volume, the lesser the difference will be between the bid price and the ask price. This could be an important consideration when you are calculating the amount of profit that you can make from trading in an option. As you gain experience in options trading, you can slowly begin to analyze the other columns as well and take them into consideration when making your investment decisions.

Where to Find Pricing Data

In addition to the options table in the newspaper, you can find basic pricing data for listed options on the website of the exchange. There are many other financial websites which give you market data on options in an easy to understand format.

How to Buy and Sell Options

Options can be traded and exercised in different ways depending on the kind of option. Usually, an option listed on an exchange can be traded though an options broker much like you would trade a stock. A trading account will have to be opened for this purpose. The transaction will involve brokerage fees in addition to the premium that you’ll pay for buying the option.

A company issued stock option can be bought only from the company itself. These ESOs cannot be traded in the open market. You will need to contact your company or the brokerage which handles the ESO issue on your company’s behalf to do this.

OTC options are traded in the OTC derivatives market. The absence of an exchange or clearing house allows the two parties to the transaction a lot of flexibility in determining how the transaction is carried out.

Generally, an OTC transaction involves an institution like a bank to facilitate the transaction. Both parties have to agree in writing to a ‘confirmation document’, which has the details of the options and the transaction terms. In some special cases, even OTC options can be routed through brokers who can then look for the right buyers or sellers.

There are many online options brokers who help you buy and sell options with convenience, such as AmeriTrade and E*Trade. These sites offer updated options data as well as trading tools to help you complete your transaction quickly and easily. Trading with options online gives you access to many different kinds of options and you can execute your transactions in seconds.

Options are highly speculative securities that let you make the most of market movements. A basic knowledge of the concepts used to trade in options is critical to succeeding with this kind of investment. Options let you gain even when the economy is spiraling down, making this one of the few investments which can actually succeed when the markets fail.

Make sure you fully understand how options work before you start trading in them. Just as you can make huge gains by making smart trades in options, you can also end up making huge losses if you have not assessed your risk properly before opening a trade.