Options Trading – Learning how to trade options:
Trading options is seen by many traders as an extremely risky investment product.
But let’s dig a little deeper into the universe of options and it quickly becomes clear that options are also a great way to limit risk.
Here you can expect tips and tricks about the investment product of options, so that you too can enrich your everyday trading with this essential topic.
What is options trading? Our explanation & definition:
The options are derivatives. These give the trader the right to buy or sell a digital asset at a predetermined time and a predetermined price. The value of an option is made up of various factors. On the one hand, there is the term of the option contract. Furthermore, the underlying value of the price also plays an important role, as does general volatility.
The options are therefore a kind of speculative bet that relate to an underlying asset (underlyings). More precisely, it is about the possible development of this underlying asset. The digital assets that can be traded with options are, for example, stocks, forex, indices, commodities or government bonds.
The options belong to the group of derivatives and the term derivative comes from the Latin: derivare, i.e. to derive. Why are the options a derivative? Because their price, in turn, depends on the price of the underlying asset.
Anyone who has the necessary know-how can dare to trade options. The options trading experience minimize the risk of suffering a total loss with this trading strategy. Within a short time, traders can make high profits with this options strategy.
However, you should optimize your own trading skills beforehand and look for a recommended broker. In addition to optimizing your own options trading strategies through active trading – for example via a demo account – you should also be inspired by the options trading experiences of successful traders.
Do the technical terms put you off?
If you look around for the first time in the area of options trading, you will come across some unknown and seemingly complex technical terms from the financial and investment sector. Inexperienced traders are likely to be less comfortable with terms such as put options or call options.
Accordingly, it is important to familiarize yourself with the most important terms before actually trading options in order to better grasp the trading structure and not to jeopardize the entire system.
Learn Options Trading: Our Options Trading Wiki
We now take a look at some of the most important terms used in options trading. This knowledge is essential as a basis for this complex subject area.
The traders do not acquire digital assets such as stocks, commodities or government bonds per se, but speculate on the development of the prices of these investment products.
Put and call options
There are always two sides to options trading: the buyer and the seller. The put option is about the right to sell a share, the call option is about the right to buy a share – or another digital asset.
Amount of capital in options trading
In order to make options trading a reality, you need a recommended broker. These usually require a minimum deposit of 250 euros when opening an account.
Who invented it – and why?
Options trading dates back to ancient Greece. There they were already speculating on the olive harvest. Even then, it was about making a profit with the right nose.
Learning Options Trading: The Most Important Technical Terms
As already indicated, you should internalize the most important technical terms before starting to trade options.
At this point we would like to introduce four of the most important terms from the field of options trading:
Strike, Call, Put and Premium.
The strike is the exercise price of the warrant and is one of the most important features of all. It is good to know that the strike determines the price of the underlying asset. It is therefore clear at what price the underlying is bought or sold when the option is exercised. It should be noted that the base value and the exercise price do not necessarily have to be identical!
The call warrant guarantees the trader the right – but not the obligation! – to buy an underlying asset after a specified period of time at a likewise specified exercise price. As a rule, it is about speculating on the increase in a price so that one can benefit from the difference between the base value and the exercise price.
The put warrant, in turn, guarantees the trader the right – but not the duty! – to sell an underlying asset after a fixed period of time at a fixed strike price. Should the price fall, the traders benefit from the resulting difference.
The premium is the price of a warrant. The premium is primarily determined by the term and the probability of whether the exercise price will be exceeded or undercut at the end of the term.
If you take a closer look, it quickly becomes clear that the shorter the term, the lower the likelihood that something will change significantly in the price development. Longer terms are therefore usually more expensive.
What trading strategies are there? First test options trading on a demo account:
Options trading comes with some risks. Accordingly, one is well advised to take a closer look at an options trading demo account in order to learn how to trade options. The various online brokers usually have an options demo account that gives you an insight into the world of options trading.
But: The options trading demo account mostly shows embellished trading results, which in reality would probably be lower. So it is not important to be impressed by the possible profits, but to concentrate entirely on the trading experience.
In order to learn options trading strategies, one should orient oneself to successful traders and their methods. Ultimately, options trading differs fundamentally from buying stocks. When learning the options trading strategies one sooner or later encounter the “Greeks”: Delta, Vega, Gamma and Theta. These statistical values help beginners to understand the world of warrants.
Speculations with Olives?
This course development game goes back to ancient Greece. At that time people bet on the yield of the olive harvest. Today olives are no longer so popular when it comes to options. Most traders focus on stock options when trading options.
When implemented, the concept means that the trader secures the right to buy or sell a share at a certain point in time for a set price. However, the trader is not then obliged to actually purchase the share.
The aim is of course to make a profit by trading options. However, this only works if the trader is correct in his prediction of the development of the share price. The share price must therefore reach a certain market value within the specified period for the purchase of the option to pay off.
The volatility of the securities throws a spanner in the works for many traders. As a result, options trading continues to be considered a risky endeavor that many traders do not dare to attempt. With the right basic knowledge and a little practice, options trading is an interesting way to increase profits and minimize risk.
Delta describes the sensitivity of an option with regard to changes in the price of the underlying asset. The option price changes depending on the change in the underlying asset, which can be expressed in points. However, not every change in the underlying leads to a change in the value of the option.
Vega describes the volatility of the underlying and shows the amount of change in the price of the option with a one percent change in the volatility of the underlying. Delta is about the sensitivity of the delta value in relation to the price change of the underlying.
Finally, it is about theta, the time value of an option. The closer the expiry date of an option comes to the trader, the more the theta value can vary.
To get all these small but important terms and values under one roof, you should look for a reputable online broker who has useful analysis software on offer. This makes options trading much easier.
What are the characteristics of good options trading software?
If you want to trade options successfully, you should secure promising software. It is important that the software delivers reliable real-time data. Long-term warrants in particular are easier to plan if real-time trading is possible.
Furthermore, as a trader, you should also get a news ticker with real-time news to stay up to date with what’s happening around the world. After all, these events also have an impact on the stock market. Of course, it is ideal if an online broker fulfills several of these criteria so that you can find all the necessary data at a glance in a relaxed manner.
Are there any investment alternatives to trading options?
The most popular alternative to options trading are binary options which are a simpler but more extreme version, with very high returns in the short term. You can usually win between 75% and 98% of the amount invested in the event of a correct investment, or lose your entire stake in the event of a bad investment.
In addition to trading options, there are of course many other forms of investment. It is advisable to orientate yourself broadly and to rely on a wide variety of investment objects, forms of investment and trading strategies. This diversification ultimately makes it possible to hedge the portfolio against total loss. If you choose a well-established online broker, you have the opportunity to let off steam there.
As with every investment and every trade, you should think about this step in advance. Depending on which investment, trading strategy and type of investment the trader chooses, there are very different factors to consider. For example, you should look around for a reputable online broker who makes trading options possible.
It’s not just about trading options with different digital assets and making them as easy as possible. In the meantime, an account with a recommended broker can be created within a few minutes and options trading can sometimes even take place via applications for mobile devices.
Preparation also includes acquiring the necessary specialist knowledge. Studying the trading strategies of experienced traders also helps.
If options trading is too complicated for you, we recommend binary options trading which is a simplified version of option trading. With these high risk / high return exotic derivatives, you can trade a range of assets like stocks, currencies, commodities & cryptocurrencies. To get more information on binary trading, we recommend going to binary-option.co, on this website you will find detailed explanation on the principle of binary option trading as well as the list of the best brokers to trade these derivatives.
We have now learned a lot about trading options. Now we summarize again the most important tips and tricks for trading with the warrants.
On the one hand, inexperienced traders should expect the transaction costs incurred. If you haven’t had enough options trading experience yet, you could be surprised.
Unlike binary options, Trading classic options may incur custody fees, brokerage fees, and trade executions. You should find out about these costs thoroughly before you start trading.
By the way: profits from trading in warrants are subject to a flat tax of 25 percent.
Before preparing the next tax return, it is certainly advisable to talk to a competent expert. Losses can conveniently be claimed as income-related expenses.
Staying cool is the top priority
Furthermore, it is always important to keep a cool head. This is not always easy, especially for beginners, because the stock market can get hot. Therefore, traders should never act out of a short-circuit reaction, but always based on a strictly calculated trading strategy. The acquisition of basic knowledge also includes technical terms such as put option, call option, premium and strike.
If you want to put your knowledge to the test, you can treat yourself to a test ride at any time via the platform of an online broker. Because there are enough providers who have a demo account on offer. You should use this to gain your first financially risk-free option trading experience. You usually quickly notice where your own skills still need to be optimized.
In general, one should always keep in mind that trading options is a highly risky affair that can also lead to total loss. If you don’t feel comfortable with this risk in your neck, you should concentrate on other forms of trading. Fortunately, there are more than enough of them.
Trading Options: FAQs
Where is options trading possible?
Trading options is possible through various online brokers. In order to find the right candidate, you should compare the different offers. The factors of the software offered, the costs and the range of digital assets must be taken into account.
Which digital assets can be traded using options?
Trading options is possible with a wide variety of digital assets, such as stocks, futures, currencies and interest-bearing securities.
Is there a helpful analysis tool for options trading?
Free scenario calculators can be found on the Internet that enable dealers to run through various scenarios. A helpful gadget when it comes to familiarizing yourself with the different trading options.
What are the perfect conditions for maximum success in options trading?
In order to be successful with trading options in the long term, one should be very familiar with the financial sector and the technical terms. Of course, this takes time and effort to familiarize yourself with this specialist area. You should also bring a small amount with you to start trading.