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5 Steps to Get Into Options Trading

Posted by Pete Stolcers on February 8, 2010

Option Trading Question

What do I need to know to get into options trading?

Option Trading Answer

If you are looking at getting into options trading, there are 5 basic steps that will help you get started.

1. First of all you need to open a trading account which will allow you to trade options.

2. Second, study the markets as much as you can. Read up to date books, online articles and talk with people who have been trading for years to find out as much as you can. It is important that you have a sufficient understanding of the market so that you can accurately predict the short term movements.

3. Next, you need to learn the language of option trading. It has its very own unique language and to get into options trading without being fluent in the language can cause you a lot of problems. If you buy a call option then you believe that the underlying stock is going to trade higher. If you buy a put option, then you feel that the underlying stock is going to drop in price. Another term that you need to know is “strike price” which is the price where you are guaranteed to be able to buy or sell a stock no matter what the actual market price is.

4. Also, be prepared for losses. It is very unlikely that you will always make money and never have any losses so you need be ready for it if it does happen. Sometimes you will have to make the decision to cut your losses at an early stage instead of trying to ride it.

5. Finally, always have an exit plan.  Before you even buy an option, you should already know when you are going to sell it. You can sell it when the option has reached a certain price, or you can sell it when the underlying stock or index reaches a certain price but either way, decide that ahead of time and stick to it as best you can.

Options trading can be a very rewarding thing to get into, but you definitely want to be prepared and learn as much as you can about trading before you start.

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