Options Trading for Beginners. A Guide of the Best Strategies
Trading may be hectic especially if you are a beginner. In fact, we have different options to trade in the market and it is important that one should know about them before they start their journey of becoming an expert trader. The first thing which comes into our mind when we think of options trading is a stock option, but there are other types as well like futures, call options, put options, etc. Let us discuss these briefly.
Best Options Trading for Newbies
This type of option gives its holder the right to buy or sell shares at a certain price within a specified time period. This can also be called “put” because this allows the buyer to place a bet on whether the share will go up or down. Stock options are usually traded over-the-counter and hence require no registration with any exchange. They are often used by companies to reward employees who help increase sales.
These contracts give buyers the right to purchase commodities such as oil, gold, silver, wheat, corn, sugar, coffee, cocoa, cotton, pork bellies, soybeans, orange juice, gasoline, heating oil, natural gas, lumber, copper, aluminum, platinum group metals and many more. Futures are bought and sold through exchanges. These contracts are regulated by government agencies and must be cleared through clearing houses.
A Call option gives its owner the right to buy something from someone else at a fixed price during some specific date. For example, let us say I want to buy 100 barrels of crude oil at $100 per barrel. If I own a call option on 100 barrels of crude oil then I would pay only $1 for each barrel of crude oil purchased. However, if the price drops below $90 per barrel, my contract automatically expires worthless. A call option has two sides; seller and purchaser. It is very similar to buying insurance against loss.
The Put option works exactly opposite to the call option. Instead of paying less than the current price, the writer pays more than the current price. So if I am selling 100 barrels of crude oil, I could write a put option giving me the right to sell 100 barrels of crude oil for $110 per barrel. But if the price rises above $110 per barrel, I lose money since I cannot exercise my rights.
Options Trading Strategies
There are various strategies available for traders to choose from depending upon what kind of investor they are. Some people prefer long-term investment while others opt for short term investments.
Long term investors tend to invest in stocks whereas short term investors focus on currencies and bonds. Here are few popular strategies followed by most of the traders:
Long Term Investment Strategy
In this strategy, the trader buys securities expecting them to rise in value over a longer duration of time. He/she does not expect immediate returns but rather hopes to make profits later on. Short Term Investment Strategy
In this strategy, the trader invests his capital hoping to get quick gains. His aim is to maximize profit within a shorter span of time.
Day traders use technical analysis tools to predict future trends. Their main objective is to identify potential opportunities and take advantage of them. Most day traders do not hold positions overnight. Rather they enter trades based on news events or economic data releases.
Swing traders trade between different asset classes like equities, futures, forex etc. The goal here is to generate consistent income without having to worry about market volatility. Swing traders look for low risk entry points into markets that offer high rewards.
Technical Analysis Tools
Technical analysts rely heavily on charts and graphs to analyze stock prices. They also study past performance patterns to determine whether an asset will continue rising or fall. There are several types of technical indicators used by these experts. Below are some common ones:
Moving averages help measure how well an asset's trend line follows historical highs and lows. MA can be calculated using simple moving average formula which takes weighted average of previous closing prices. This helps smooth out daily fluctuations and provides a better picture of overall direction.
Stochastic oscillators work similarly as MACD indicator except it uses exponential smoothing instead of linear averaging. These indicators provide signals when there is significant change in momentum.
Relative Strength Index
Relative strength index measures the relationship between recent movements compared with those of prior periods. RSI values range from 0-100 where higher numbers indicate stronger upward movement. An RSI reading near 50 indicates strong up trending activity. A reading below 20 means downward pressure has increased.
Charts & Graphs
Charts and graphs play a vital role in analyzing financial information. Chartists use these visual representations to spot important changes in price action. For example, chartist may notice that a security has been trending upwards for three months before breaking through resistance levels. Once broken, the security begins its decline towards support levels.
There are many platforms available online today. Some popular options include:
Etrade - Etrade offers both web and mobile apps. It allows users to access their accounts 24 hours a day via any device connected to internet. Users have full control over all aspects of their account including portfolio management, order execution, fund transfers, margin lending, and more.
TD Ameritrade – TD Ameritrade was founded in 1969 and now operates across North America. Its platform features real time quotes, live streaming ticker updates, customizable watch lists, alerts, and much more.
Interactive Brokers – IB is one of the oldest brokers around. With over 1 billion dollars traded each year, this firm boasts of being the largest independent broker dealer in the world.
Robinhood – Robinhood is another great option if you want to get started investing but don't want to pay exorbitant fees. You can open your account free of charge and invest up to $2,000 per month.
Benefits of Trading as a Beginner
The benefits of trading as a beginner are numerous:
You’ll learn about risk tolerance and money management skills.
By trading stocks, you're able to make profits without having to spend thousands of dollars on expensive brokerage services. In addition, you won't need to worry about taxes since most exchanges allow traders to keep 100% of their gains.
You'll gain valuable experience in managing your own finances. By learning how to trade successfully, you'll become familiar with the market and develop confidence in yourself.
You'll gain experience in dealing with market volatility.
As a beginner trader, you'll be exposed to different types of securities such as equities, commodities, currencies, bonds, futures contracts, etc. This will help you understand what drives markets and why certain assets perform better than others.
Your investment decisions will become less emotional and more logical.
Trading will help a newbie avoid making irrational mistakes like buying high or selling low.
There's no guarantee that you'll succeed at first. If you fail, it could take weeks or even years to recover.
It takes some practice to master technical analysis techniques.
If you lose too much money, you might end up losing faith in the stock market altogether.
The Bottom Line
If you've decided to start trading, it's best to do so slowly. Start by opening an account at a reputable broker and then gradually increase your exposure to the stock market. Don't try to jump right into complex strategies because they require years of practice. Instead, focus on basic technical analysis first. As you gain experience, you'll eventually find out which strategy works best for you.
As an investor, there are two main goals you should strive for: maximizing returns while minimizing risks. To achieve these objectives, you must know when to buy and sell shares.