Option traders can benefit from being an option buyer or an option writer. Options allow for potential profits both in times of volatility and when the market is calm or less volatile. The options are among the most popular vehicles for traders, because their price can move quickly, making (or losing) a lot of money quickly. Options strategies can range from fairly simple to very complex, with a variety of benefits and sometimes strange names.
Fortunately, Investopedia has created a list of the best online brokers for options trading to make getting started easier. There are advantages to trading options rather than underlying assets, such as downside protection and leveraged returns, but there are also disadvantages such as the requirement for a down payment of the premium. Before buying or selling options, investors should read the Characteristics and Risks of Standardized Options brochure (PDF 17.8 MB), also known as an option disclosure document. Options are a form of derivative contract that gives contract buyers (option holders) the right (but not the obligation) to buy or sell a security at a chosen price at some point in the future.
If a call option gives the holder the right to buy the underlying at a fixed price before the contract expires, a put option gives the holder the right to sell the underlying at a fixed price. If the underlying stock is lower than the strike price of the call option on the expiry date, then the option has no value because it is “out of the money”. Trading options that are index-based can partially protect you from the huge moves that individual news can create for individual stocks. Buying OTM call options seems like a good starting point for new option traders because they are low-cost.
For self-directed traders who are serious about trading options, ChoiceTrade is the preferred online options broker. An option has a fixed life, with a specific maturity date, after which its value is liquidated among investors and the option ceases to exist. Conversely, a higher strike price has more intrinsic value for put options because the contract allows you to sell the stock at a higher price than it is currently quoted. In addition, brokers have MOSTLY eliminated fees, but not the contract fee (especially if you trade futures options, those are EXPENSIVE fees).
They want to make sure you have enough investing or trading experience to hopefully make good choices when it comes to options. Once you understand the process and risks of options trading, it will be much easier to invest your money in options and get a lot out of it. Prior to joining Ally, Brian was a senior personnel instructor for the Chicago Board Options Exchange (CBOE) and led the training department of one of the world's largest market makers, Knight Trading Group. There are some advantages to trading options for those looking to place a directional bet on the market.