How to Trade Options in 5 Steps

How to Trade Options in 5 Steps

Monday, November 8, 2021 2:58 pm

Trading options


How to Trade Options in 5 Steps

Options are a unique tool that effectively reduces risks on existing positions on both futures and stocks. They are also assets that allow speculations not only on rising and falling markets, but also movements in other directions. For example, you can speculate on sideways markets, or even on price failures to reach certain levels.

Since the success in trading lies in traders’ ability to minimize risks, we recommend you to start learning options trading when you buy your first stock (or futures) because options help control risks much more effectively than stop-loss orders.

Before delving into the basics of options trading, it is very important to choose a brokerage company that gives you access to a range of trading instruments as well as the conditions for successful trading.

Exness has been a reliable company for millions of traders. When you trade with this broker, you will have access to the most popular financial markets. You will also be guaranteed the support of a company that cares about your capital. You can learn more about the broker’s services and open an account by visiting

Now let’s have a closer look at options:

What Are Options?

An option is like an insurance. Imagine that by buying shares, you can conclude a one-month contract to sell back your shares at a predetermined price (strike price). For example, you can do so if the share price does not go up.

The cost of such an agreement would average 3-3.5% of the value of the shares. If the stock price rises, traders will be profiting from the shares, minus the cost of the option (because it is not reasonable to execute the sale at a lower price).

Organization of Options Trading

Trade-in options on the exchange take place on the futures market, where futures contracts are also traded. Options profit/loss is generated by calculating/discounting variation margin at 7:00 p.m.

Transactions are completed by reserving collateral, similar to the way futures contracts are traded. Options are also traded between 10:00 and 23:50 according to the futures market timetable.

Trading options

An option is the right to execute a transaction in an underlying asset at specified conditions (according to the specification) up to a specified date in the future (expiration date).

Futures are the underlying assets of options. In the futures market, options are offered for the same assets as futures, for instance, stock indices, currencies, commodities and the most liquid stocks.

Since there is almost no difference between the dynamics of stocks and futures on these stocks, a futures option can ensure positions on stocks.

Types of Options

Options come in two variants, namely call and put options.

A call option is a contract for the right to buy an asset before a certain date in the future at a currently determined price and quantity.

A put option is a contract to sell an asset before a certain date in the future at a currently determined price and quantity.

If you buy a futures or stock and the price of the asset goes down, having a put option (right to sell) will allow you to write off the available cheapened asset at the price specified in the option, also known as the strike price.

Similarly, if you have a short position on an asset and a call option (right to buy), you can close the position at the strike price if the price of the sold asset moves negatively.

Information on options is presented in the form of option desks, where in the center are the strike prices (at which futures trades will be made); in the green field on the left are call options; in the red field on the right are put options.

Conversely, for each strike, options prices are presented: theoretical price (recommended by the exchange), demand (best bid price) and offer (best ask price). The rest of the prices (not just the best, with volumes) can be viewed in the stack of the respective option.

Buying Options

It is also possible to trade options without trading any underlying assets and you everyone can start doing this with this resource. In this case, a call option will be profiting when the price of the underlying asset rises above the strike price.

You can exercise your option at the original, lower strike price when the asset’s price increases before the option expires. In other words, you will be buying the asset at a discount.

To profit from a put option (right to sell the asset), the price of the underlying asset has to fall below the strike price. This gives you the opportunity to sell at a higher price than the current asset price.

Selling Options

Other than buying options, you can sell them and gain profit by not moving the asset to the strike price.

If you think that the market will not rise above a certain level (levels can be taken above the current price) before your option expires, you can earn potential profits by selling a call option with the relevant strike.

If you think that the asset will not fall below a certain level before the expiration date, then you may make money by selling a put option with an appropriate strike (the strike price can be taken below the market).

Thus, buyers and sellers of options have different rights and opportunities. If option buyers have the right to execute their contracts (they may or may not exercise this right, for example, if it is not expedient), option sellers must execute their obligations at the request of the buyers.

Risks in Options Trading

Option buyers’ risk:

Full loss of value of an option in case of inexpedient execution (if the price has not exceeded the strike on the option’s value).

Option sellers’ risk:

The necessity to execute the buyer’s claim at an unprofitable price (if the option price has exceeded the strike on the value of the option itself).

The buyer has unlimited profit potential if the value of the underlying asset moves above the specified strike in the direction of the option. However, the buyer will be exposed to high risk if this movement is not realized before the expiration date.

If you think that the movement is unlikely to go through, you can reduce your risk by selling your option.

The income of the option seller is limited to the amount paid by the buyer. Yet, the risk that the seller is exposed to is unlimited if the price of the underlying asset goes beyond the strike price by more than the value of the option.

Nevertheless, the seller is more likely to make a profit since either a movement of the asset in the opposite direction to the strike price, or no movement at all, is sufficient for the seller. The buyer makes a profit on a strike price movement.

Options can be bought not only individually but also in a complex way, forming a portfolio of options, which will generate income in a more non-linear way.

For example, if you buy both a call and a put at the same strike at the same time, you can make a profit from any movement of the underlying asset, whether it is an increase or decrease in price by an amount greater than the cost of acquiring both options.

This is because the put option goes down in value, while the call option goes up. You will be profiting as soon as the call rises above the values of the put and call options.

Similarly, if the value of the underlying asset decreases, the value of the call option depreciates. At the same time, the value of the put option increases.

And as soon as the value of the put option rises above the value of both options, the trade becomes profitable.

This kind of option design is called buying volatility.

To be successful in stock trading, learning how to trade options is highly desirable because options help control risk.

Traders can make money on completely non-linear variations of price movements by constructing different option structures, but it will require more experience.

5 Steps to Successful Options Trading

  1. Learn all aspects of options trading and acquire all the important knowledge. Without knowledge, you simply won’t be able to trade options or any other instruments.
  2. Open an account

Before opening an account, you need to understand one thing: although options trading can bring you good returns, it is very risky. It involves entirely different capitals from stocks and other instruments.

Hence, you must understand exactly how to trade options, what strategies to use and how to reduce risks to become a successful options trader.

Brokers also understand the high risks that options trading involves. Therefore, it is not easy to open an options trading account. Traders have to go through thorough checks before they can start trading options with brokerage companies.

Brokers have to make sure that their clients is fully ready before allowing them to trade options. After all, if a trader suffers considerable losses due to wrong decision making, it may be detrimental to the broker’s reputation.

This explains why brokers will evaluates a trader’s trading experience, their financial readiness and understanding of risks before allowing the trader to open an account.

Every detail of this verification process will be documented in the options trading agreement, and only in case of a positive decision will the broker allow the client to trade this instrument.

  1. Decide which options you want to buy and sell

You will need to analyze in which direction the price of the share or any other instrument will potentially go.

If you are speculating on a rising asset, you can buy a call option and sell a put option.

You can sell a call or put option if you believe that the value of the asset will be stable.

If you predict a decline in the value of the asset, you can target your potential profits by buying a put option and sell a call option.

Options trading is simple in theory. However, in reality, experienced traders, who gain the best results when trading options, use advanced strategies to increase their chances of success.

  1. Predict the strike price of the option

Put options are only profitable when the asset price drops below the strike price before the expiration date. As for call options, the asset price must be above the strike price for the trade to be profitable.

Traders have to buy options whose strike prices reflects his or her prediction of where the stock price will be at the time the option expires.

  1. Determine what the term of the option will be

Every options contract has its expiration date, which has to be taken into consideration as you can only exercise the option till the end of this period.

Pay attention to the fact that these expiry lines can be very different, starting from a few days up to years. It is also important to distinguish between two types of options, namely American and European.

A European option can only be exercised on the expiration date, while an American option can be exercised before the expiration date.

American options are generally more expensive than European options because they give buyers more flexibility and freedom.

These five simple steps will allow you to trade options successfully, but it’s important to realize that a lot will depend on your knowledge and the decisions you make.

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