Question:
I am all set to trade but I am having a hard time pulling the trigger on the first one. I have a few stocks in my account, but I really want to give options a try. Thanks.
Answers:
The first thing you must do before you begin to trade options is to make sure your account is cleared to trade options. If your account is cleared to trade options, then read the booklets and information that the brokers give you about the risks in trading options.
Since you already have certain stocks in your account, research them and see if they are optionable. Sell an out of the money call option on a stock that you already have in your account. Use the premium to buy an in the money call option on another stock.
coverd call, or long a put, honestly though I would say stay away from options unless you have really spent a longtime studying the mechanics, options always have a winner and a loser and if you don't know what your doing you will probably be a loser
80 % of the day traders loose their shirt. I say S&P 500 and stay sit on it for ten years.
If you are unsure of whether to choose a call or a put, then you haven't done enough research on your stocks. If you have done your research and you are confident that the stock will be going up, then you buy the call option. If you are expecting the stock to take a plunge, then buy the put option. If you have no clue, then stay away from options contracts.
The option you should try first is the call. If you were to buy a call option, the worst thing that would happen is the option would expire and you would lose the premium you paid. If you have to exercise the option, you have the right to buy the stock at a lower price than market value (less the premium paid).
If you get comfortable with options and can read fundamentals well, writing covered calls (selling calls on stock you own) can be next. This is a way to earn some extra income on stock that is not growing. The options will expire worthless and you will gain the premium someone paid to buy the option.
Puts would be good if you know the stock will decline in value and you know you want to dump it anyway. This will allow you to sell at a potentially higher price. Writing puts (selling a put option to someone) on stock you own could add income if you know the stock price will keep increasing. The option would expire, you gain the appreciation on the stock plus the premium you receive from selling the put option.
Writing options is more risky than buying because a little more research is involved. The risk involved is why brokers have you fill out additional paperwork before making your first transaction. Never speculate with more money than you are prepared to LOSE!
Ron, ChFC
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