By Arjun Chandrasekar.
Summary
Options trading is arguably one of the more difficult forms of trading, including various terminologies such as calls, puts, derivatives, etc. This blog is meant as a simple introduction and overview of what options trading is, and hopefully it allows you to gain a better sense of this investing form.
Purpose
Options are essentially contracts in which investors can buy or sell stocks at a given price until the contract has expired. This given price is generally 100 shares of a stock for each contract placed, however investors are able to negotiate prices for their circumstances and general needs. Options can be simplified to “bets,” as investors are practically gambling if a stock price will rise or fall and submitting a contract for the gamble. The buy and sell variations of options trading are called calls and puts, respectively. Many investors choose to trade options mainly because of the short-term monetary benefits. Also because it requires a smaller initial investment price, allows them to see how the stock trends over time, and protects investors from risky stocks as this form of trading is a regulated contract. However there are multiple disadvantages including the fact that options contracts can hold for long periods of time, which can indulge unlimited losses, and it requires more knowledge of screening and graph analysis beforehand, meaning investors have to spend more time understanding the variety of terminologies and strategies used to predict price movements.
Trading Platforms
Options trading uses trading platforms to execute transactions, just like trading regular stocks. When researching which platform works best for you, you should review trading tools for analysis, price of commissions, and the variety of choices and resources they provide. We’ve compiled a list of the top 3 for you based on these variables below, but also keep in mind that there are hundreds of other platforms providing similar resources.
- Etrade:
- Offers no commission fees for trades, a variety of tools including Power Etrade for screening and analyzing stocks trends, Bloomberg TV for current news on the market, and a “Markets & Ideas”, section for analyst’s opinions and more information for investors to follow up on.
- TD Ameritrade:
- Offers a unique set of tools including the thinkMoney magazine, educational videos, fun quizzes, and progress tracking. In a sense, these tools make investing out to be a game in which users spend time increasing their progress on the platform while learning, reading, and gaining knowledge. The desktop view is by far the best, and it includes some of the most high quality user interface features.
- TradeStation:
- Offers no commissions fees for trades but $0.50 per option contract, includes a tool called OptionStations Pro for high quality screening and analysis, and allows investors to trade in a variety of ways such as stocks, ETFs, futures, crypto, mutual funds, etc.
Conclusion
In short — there are a plethora of benefits options trading has for avid investors, the short-term returns rates for correctly selected contracts are impressive. But unlike regular stock trading, options trading requires investors to know excessively about how to use the different screeners analysis techniques in order to choose the right contracts. So it does take a hefty amount of time on the investor’s end to do their own research and formulate a strategy for selections, but if you’re up for the work, it’s a great choice not only to learn more about the principles of finance but also to understand how to properly use the tools provided to your advantage.
If you would like to learn more about the stock market or finance, be sure to check out our other blogs and subscribe below to receive updates when new blogs are published!
