How to get started in options trading? 5 Recommended Brokers for Option Trading Beginners

When people heard the words trading, they already perceived it as something complex. What's more, if the word stock is added to it, people perceived it as something complex and pricy, which is why very few people chose to traverse this financial field. While this perception about trading would be hard to change, there are enough compelling reasons why this belief is not entirely true. One such testament is options trading. At first, options trading may sound overwhelming to some, but they should not be overwhelmed by the term but by the prospects it can give. It may sound complex and demanding, but with the help of some key points, people can easily understand how the "system" works.  Investor portfolios are typically made up of various asset classes like stocks, bonds, ETFs, and even mutual funds. But aside from these, there is another class of asset called options. While these options may be a bit riskier, if used correctly, they can offer a wide array of prospects, benefits, and the potential to be more profitable than stocks. So, if stocks are not up to your appetite, then options could be your thing.

What is options trading?

Basically, options trading is the trading of options. But what are options, or what is an option? An option is a contract with other investors that give you the right to purchase or sell an amount of a certain underlying asset at a predetermined value within a certain period. This contract with other investors also lets you bet on a stock's direction (whether up or down). For the reason that the options' value is inherently tied with the underlying asset, it is considered as a derivative. And like other classes (stocks, bonds, etc.), options can also be purchased through a brokerage investment account.

Options are valuable and flexible investments that people use for potential income, to speculate, for protection, for leverage, and to hedge risks. These uses of options make it a robust investment as it can enhance someone's portfolio. These options are usually used by investors at an appropriate time to maximize their potential and enhancement features fully. One such scenario is to use the option as a hedge in a declining market to minimize losses. This scenario is an example of the decision-making needed in options trading. There are always three decisions to make: the stock's direction, the high or low of its movement from the current price, and the time frame when that scenario will happen.

There are two common types of options that investors need to learn: call and puts. The call is the one that gives the buyers the right but not the obligation to get a stock at a price specified in the contract. While on the other hand, pull options provide the holder the right to sell the stocks.

How to get started in options trading?

Getting yourself into trading options is not that hard. With a few steps, you can have your hand in this asset class trading with a lot of potential for growing wealth. In this section, you will learn the six simple steps you need to know and learn if you are planning on investing in this asset class.

1.      1. Know what options trading is

Like any other endeavor, before you can start trading this asset class, you first need to know what you are doing. The likelihood of failure will only increase if you, the investor, do not see the thing you are getting yourself in.  To avoid and mitigate this, as a first step, research things related to this matter; you can browse the internet to look for information or simply ask those who already ventured into this trading.

You do not need to have a "master" or "broker" knowledge if you are planning to start trading options; you just have to look at how the system works, the things you need, the prospects or possible benefits, and of course, the likely risks that come along with this.

2.      2. Look, compare, and shortlist the brokerage firms

Just like the first step, looking and comparing brokers also need research. Almost all brokerage firms have the same features, which makes the decision harder to make.  But always remember that while all of them offer the same features like options tools, accessibility through mobile access, platform features, quality of research, and others, some of them have better performance on one or two particular features. Some have better perks and fees than others, and these are things you should consider too. Commission, therefore, is one of the determining factors. Some brokerages offer a discount based on the trade volume you will be trading, while others opt for a fixed single rate.

The decision is up to you, but always go to a brokerage firm you are comfortable with and has the same features as the others but can give you those features for a lower price.

3.      3. Open your options trading account and be prepared

Upon deciding which broker you want to use, you need to apply to that brokerage and open your account. But opening your account will not happen on a whim. Given the complexity of predicting several factors, brokers assess potential investors before letting them participate in options trading.

The research you made in the first step will help you in this assessment. Brokerage assesses potential investors to know their background and gouge their experience, understanding of the system and risks associated with it, their goals, and most importantly, financial preparedness since opening an options trading account requires a bit more than a stock trading account.

4.      4. Pick which option you would buy or sell

Upon opening, choose which option you would buy or sell. To review, there are two common types of options that investors need to learn: call and puts. The call is the one that gives the buyers the right but not the obligation to get a stock at a price specified in the contract. While on the other hand, pull options provide the holder the right to sell.

Buying or selling options is dependent on one of the three decisions you need to make, predicted direction. If you anticipate that the price will go up or increase, then buy a call option, and sell a put option; if you think the opposite will happen, then do the reverse. If you believe that the price will stay the same, you can sell either a call or buy option.

5.      5. Think of the possible strike price

An option is only valuable if the stock price nears to that of the option's expiration period which means either above or below the strike price (above the strike price for call options, and below the strike price for put options). With this, it would be natural to buy a strike price that reflects your prediction for the prices of the stocks in a particular time frame.

6.      6. Think of and identify the option time frame

All contracts have expiration dates which determines the last day where you can exercise your right to an option. You cannot have this expiration date in just a whim since you can only have those offered when you call up an option chain.  There are two kinds of options that determine when you can exercise your right on an option, American and European. Those who have American options can exercise their right until the expiration date, while European option holders can only exercise their right on the specified date of expiration.

5 Recommended Brokers for Option Trading Beginners

There are many brokerage firms out there that beginners can easily use to start their options trading endeavor. Together with their delightful features and arrangements, beginners can easily begin their options trading endeavor.

1.      1. E*TRADE

2.      2. Ally Invest

3.      3. Charles Schwab

4.      4. Trade Station

5.      5. TD Ameritrade

5 Tips to Bear in mind for options trading beginners

1.      1. Keep on Researching

Research will be an asset if you plan on doing options trading. Research benefit you. The better you understand how things work the better you can understand the behavior of prices.

2.      2. Know the differences between stocks and options

Though stocks and options are both asset class, the two are different. If you are really new in finance then this would make less of an impact but, if you are familiar in stocks then, this would be valuable. Options are simply contracts, when an investor buy an option, he or she is not specifically buying or owning a stock. And unlike stocks, options have expiry date.

3.      3. Read and Study Strategies

There are lots of strategies when it comes to options trading you just have to look for them in the internet. Knowledge is an investment in this sense. The better you strategize the better your results could be.

4.      4. Time is Essential

Always look for the time frame of the stock contracts. Options have expiry date so, before committing be sure that what you will buy will move on the direction your like before or on the expiry date.

5.      5. Be ready for both profit and loss

All investments have risks, though options have the potential for "wealth accumulation", it also has potential for loss. Don't invest blindly, and be prepared for some volatility.