Options trading offers a low-cost alternative to the buying and selling of stocks on the open market at full price. An option is a contract made between you and another to buy or sell a specific stock at a set price before a set date. Unlike the holding of actual stock, your only risk is the fee, while your possible reward is the difference in actual stock price on the day you exercise your contract and the contracted price. Being successful at options trading however takes knowing how to judge the market correctly before making the contract.
Open an account with a full-service brokerage that handles trades on the options market. You’ll need to deposit a minimum sum of money with most brokerages for options trading depending on the brokerage house and the account features. The more services offered, such as corporate analysis reports and broker advice, the higher the initial deposit is likely to be. Find a brokerage that offers multiple means of communicating a trade, such as online or by phone, to ensure you don’t lose out on profit potential because of communications issues.
Research the companies you wish to make an options contract concerning. A successful contract depends on accurately predicting market movements. Examine the company’s past market performance, position in its industry, announced plans, anything that will give you an idea on which direction the stock is likely to move and by how much.
Determine your position regarding the company’s stock. This should include an estimated stock price on the day you wish to set as the end of the contractual period. Since you can contract to buy or sell a stock by a future date your position can be either bullish with the belief that the stock price will rise, or bearish, believing it will fall. Either way can be profitable.
Make the contract using your set predictions. You’ll have to find someone willing to meet your terms either selling you their stock by the exercise date at the contracted price, or willing to buy stock from you by the contracted date. The fee attached to the contract depends on the contracted terms.
Wait for the perfect moment to exercise your option. The more volatile the market the better your chances are to hit a profitable moment. If you’ve contracted to sell a stock at $25 before the exercise date, then wait for the stock to drop below the contracted price. When the price is as low as you expect it to go, for example $20, before the last day of the contract then exercise the contract and sell at the contracted price.
Allow the contract to expire with no additional penalty if the price never reaches a profit point for you.
- Allow the contract to expire with no additional penalty if the price never reaches a profit point for you.
Larry Simmons is a freelance writer and expert in the fusion of computer technology and business. He has a B.S. in economics, an M.S. in information systems, an M.S. in communications technology, as well as significant work towards an M.B.A. in finance. He's published several hundred articles with Demand Studios.