Options trading for beginners

Trading options is complex, therefore knowing the basics is extremely important and can help you to better understand how this instrument works. To achieve this, the best is to choose a great trading platform to use.

Options trading for beginners

Options explained

Check out our article entitled What is options trading? for a quick overview of the most important definitions for an options trader.

Let’s sum up the most important details about options:

 

  • Options belong to the group of derivatives, meaning that the derivative’s price is dependent on an underlying product such as stocks, indexes, commodities and others
  • A financial option is a contractual agreement between two parties, giving the right to the buyer to buy (call option) or sell (put option) an underlying asset at a pre-determined price before the option expires
Options trading for beginners

Beginner strategies and where to go next

How should a beginner start to trade options? How to evaluate strike prices? When to trade? These questions are among the most important ones when it comes to options trading. 

Dr. Alan Ellman from The Blue Collar Investor gives the following advice. 

About how a beginner should start to trade options:

“The best first strategy is covered call writing. Retail investors must master the 3 required skills before risking even 1 penny of their hard-earned money.

  • Stock selection
  • Option selection
  • Position management”

About evaluating strike prices:

“[…] Strike selection is based on personal risk-tolerance, overall market assessment and strategy return goals (how much are you seeking to earn?). A more aggressive approach to selling calls (covered call writing) is to use strikes higher than the current market value of the stock. This allows us to generate 2 income streams per-trade, one from option premium and the other from share appreciation from current market value to the higher strike price. A more defensive approach to covered call writing is to sell call options with a lower strike price than the current market value. The higher premium will provide additional protection to the downside but not allow for share appreciation.”

And about when and how to trade:

“Options should be traded during normal market hours with limit orders (specific price or better). I like to enter my trades between 11 AM ET and 3 PM ET. This will avoid early morning and late afternoon volatility resulting from institutional computerized trading. Position management trades can be executed whenever those opportunities present.”

-Dr. Alan Ellman, The Blue Collar Investor

Options trading for beginners

Best options brokers

At BrokerChooser, we are in the business of helping investors find the best brokers and trading platforms for their needs. True to our mission, we went ahead and did the research to identify the best options trading platform in 2021.

What makes a trading platform good for options? First of all, it needs to offer fair fees for options trading and withdrawal. A high-quality desktop trading platform and advanced research tools are also essential. And finally, a wide selection of options products is an important factor.

We analyzed almost a dozen brokers and the result was a list of the Best options trading platforms. Check it our for further explanations on options and fees for options.

Options trading for beginners

Where to look for more?

Hope you liked this quick rundown about options. If you’d like to go deeper, navigate to one of the articles below:

  • What is options trading?
  • Options trading examples
  • The pricing of options
  • How should a beginner options trader manage their risks?
  • What are the benefits of writing an option?
  • Options trading strategies
  • What is a binary option?
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