Want to learn how to trade stock options? You’ve come to the right place. In this complete guide, we’re going to cover everything you need to know about how to buy stock options and earn consistent profits by incorporating these into your investment strategy.
These contracts may be a bit more complicated than traditional stock trading. However, they present a great opportunity for active traders that are up for a challenge. They also serve as a great way to hedge risk. But there’s no doubt about it – getting started with options trading is far more convoluted than other investment styles – like swing trading, for example.
But by the end of this in-depth discussion, you’ll feel confident in taking your next steps towards options trading. We’ll explain what these contracts are and how they work. We’ll also explain the pros and cons of this investment strategy. Then, we’ll break down how to actually buy and sell options contracts so you can start making supplemental income, prepare for your future, or achieve any other goal you have as an investor.
Stay tuned to the very end where we provide you a few tips to earn higher profits more consistently as an options trader. First and foremost, though, what are stock options?
What Are Stock Options?
The first thing we need to talk about before we teach you how to trade stock options is what they are in the first place. If you want a more complete introduction to stock options, we encourage you to read our full guide on what stock options are and how they work. However, we’ll summarize it for you below:
Simply put, stock options are contracts. When you buy stock options, you aren’t buying shares of a company. That is the main difference between stock options vs stocks. Rather, you are buying a contract. That contract represents the right – not the obligation – to buy or sell shares of stocks at a predetermined price (and before a predetermined date).
As an investor, you will buy options contracts that you believe to have favorable terms. For example, if you expect the price of a certain stock to drop dramatically in the coming months – you can buy a put option contract. The put option contract gives you the right to sell stock. So, if the stock price drops a few dollars over the coming months after you purchase your contract, you can then exercise your options contract – selling your stock at a premium.
A call option, on the other hand, gives you the right to buy stock. If you believe that a company is going to rise in value over the coming months, you can buy a call option. If your theory proves true and the stock goes up, you can exercise your options contract to buy that stock at a discount. Simple enough? Let’s move on to explaining why learning how to trade stock options is such a worthwhile endeavor.
Why Should You Learn How To Trade Stock Options?
Why should you learn how to buy stock options? The obvious reason is you want to know what you’re doing before you start investing real cash. Options contracts are a bit trickier to get the hang of investing in than traditional stocks. While you may know all about swing trading strategies, options trading is an entirely different beast.
With all this said, is it even worth your time to learn how to buy stock options? The answer is a resounding yes. Here are a few of the advantages of learning how to trade options.
- Incredible Leverage: Options are as cost-effective an asset as you’ll find. Because you’re buying future-based contracts, you can find really favorable terms that allow you to spend a little cash to generate a whole lot of profit!
- Low Risk: Because options contracts don’t require you to actually buy stock – until you decide to exercise your contract – the risk is very low. You are only staking the purchasing price of your contract. And typically, this is a very low fee.
- High-Profit Potential: Because you are paying so little to secure your contract, the profit potential with options contracts is high.
With all this said, there are a few drawbacks to options trading you should know of. There will inevitably be situations where you suffer from time decay. Remember – options have an exercise date. After that date, the contract is void. And the closer you get to that date, the lower value your contract has. If you’re a few months into a 6-month contract and the price has barely budged, you are in a tough situation. Fortunately, you’re only out the cash you paid for the contract. And like we said, these contracts can be very cheap.
You should also be aware that when trading options you’ll pay higher commissions than you would traditional stock market trading. This is why finding a quality discount broker is so important. But besides these two problems, there are no real drawbacks to trading options. So without further ado, let’s teach you how to get started trading options contracts.
How To Trade Stock Options: Buying & Selling Contracts On The Market
Ready to learn how to trade stock options? Options trading isn’t as simple as traditional trading styles. But by the end of this section, you’ll be equipped with all you need to get started. The first step? Immersing yourself in the world of stock options trading and learning as much as possible.
Step 1) Start By Immersing Yourself In The World Of Stock Options Trading
Step one to learning how to trade stock options? Immerse yourself in the world of options trading. You need to familiarize yourself with key terms, different types of contracts, and more. As we mentioned earlier, our previously linked introductory guide to stock options is a great starting point. There, you’ll learn the basics of options contracts and how they work.
But beyond that, you should take time out of every day to learn more and more before you start investing your own cash. You can take a look at our article on swing trading options to learn a bit more about one particular strategy with options trading. But as we’ll discuss in the next section, there are all sorts of strategies you can employ with options trading. You should also prepare yourself for the future by learning all about how stock options are taxed.
Another great way to immerse yourself in the world of stock options trading? Watch as others do it. Take a look at the VectorVest YouTube page and see some of our options trading videos – these are an incredible resource. With all this said, the best way to learn how to buy stock options is to invest in a detailed course put together by experienced trading professionals. We’ll help you find the right course later on. Let’s move on to step 2.
Step 2) Determine Your Goal With Stock Options Trading
As we briefly touched on, you need to determine what your goal is before you try to trade options. Maybe you want to generate income in the short term. If so, your goal will be on maximizing profits with options. But maybe you’re more interested in preparing for your future. If so, you’ll make more strategic long-term plays.
You can also use options as a way to hedge risk. If you want to mitigate risk on a current position you’re holding, you can purchase options as a hedge.
The point is that the best way to trade options will depend on what you want to get out of your investment. This is something only you can determine for yourself. Once you’ve specified what your goal is as an options trader, it’s time to move on to actually finding stock options contracts to buy.
Step 3) Find Stock Options Contracts To Buy
This is the fun part. Now that you are feeling confident in your abilities and you know what you want to get out of this investment, you can start looking for opportunities. So, how do you find options contracts to trade? It’s no different from using swing trading indicators as a swing trader. You’ll have to get into your trading dashboard and filter through stocks.
Technical analysis is a great way to find opportunities. But if you’re taking a long-term approach to options trading, you’ll want to take into account fundamental analysis, too. This will give you insights into the overall health of a company and where it could be headed. So, be sure that your scanning process incorporates both fundamental analysis and technical analysis.
Remember – your goal is to find a stock that you predict will change in price over the coming months. You can cash in on either positive change or negative change in stock price – you’ll purchase either a put or call contract accordingly. A company can be trending downward over a 12-month span and you can make a killing trading options for that company.
When it comes to finding options contracts to buy, it’s as simple as finding companies that you believe present good profit potential and minimal risk. If you find a company’s stock price is currently bottomed out around $3, but you believe it has the potential to get up to a price of $10, you’ll want to find call options so you can then buy that stock at a discount in the future.
If you really want to set yourself up for success as an options trader, though? You’ll need to invest in tools to help you find winning opportunities on autopilot. We’ll talk about that later on. For now, let’s move on to actually buying stock options contracts.
Step 4) Buy The Stock Options Contract
So you’ve found a company that you believe presents a great opportunity for your strategy. Now what? Trading the stock itself is easy – you log into whatever broker you use and buy shares. But how do you buy stock options contracts? Similar to any other type of asset, you’ll go through a brokerage.
These days, you have a bit more control over the terms of your contract than before. You can obviously choose the type of options contract you want to purchase – be it a call or put. But, you can also choose an expiration, strike price, number of contracts, etc. Just know that the more favorable your terms are, the more you’ll pay in premium.
Once you’ve submitted your order, there may be a waiting period while the market finds another trader selling the contract. Sometimes the order will be executed immediately.
Step 5) Manage Your Position & Wait Patiently
Once you’ve got your contract, it is time to play the waiting game. You can manage your position by staying up on the company or industry trends while monitoring your indicators. If your contract is in the money (you will earn profit by exercising the options), you can choose whether you want to capture profits or continue waiting.
Keep in mind, though, with each passing day, your contract drops in value. This is the time decay aspect we spoke about earlier. The longer you wait to exercise your contract, the less value it has in terms of reselling. To help you navigate this step, we wrote a guide on when to exercise stock options to help you realize profits and mitigate risk.
Step 6) Exercise Your Stock Options Contract Or Sell It Off
Eventually, the time will come when you are ready to exercise your stock options contract or sell the contract back on the market. If you choose to exercise your call contract and buy shares at the strike price, you have two options. You can immediately sell off your shares for a profit, or you can continue holding to try and earn more profits. Of course, you can also find the middle ground – selling off some shares while holding others for higher returns.
Inevitably, you will deal with options contracts that never quite make it in the money. Exercising them is not an option, as you won’t make any money. In fact, you could lose money. So, you can consider selling your contract back on the stock market to other speculative investors. Or, just let the contract expire. Remember – you’re only out the premium you paid for the contract.
How To Buy Stock Options Contracts That Earn Profits Consistently: Tips & Tricks
That just about concludes our guide on how to buy stock options contracts. But we want to leave you with three more tips before wrapping things up. These will help you set off on the right foot with the highest likelihood of success.
Invest In Yourself With A Quality Course
We mentioned earlier that investing in yourself with a quality course is the #1 way to get started as an options trader. This will take you from a complete beginner to a confident, eager trader faster than you could manage on your own. The key is finding a course that offers the best value for your money.
And if you’d like a recommendation so you can hit the ground running, take a look at Options Paycheck Experience. This is the #1 program for generating consistent income from options spreads – even if you’ve got no prior experience trading options whatsoever! There, you’ll learn a systematic approach that gives you the highest probability of success as an options trader.
Set Yourself Up For Success With The Right Trading Tools
Along with a quality course, you’ll also need to set yourself up for success with the right trading tools. Remember back when we discussed how to find options contract opportunities? We’re going to let you in on a little secret. The top options traders don’t just rely on their own research. Instead, they use stock forecasting tools like VectorVest.
This tool in particular helps you identify profitable opportunities without you having to lift a finger. Just pull up the ‘hot stocks’ search and find winners. Or, pull up a specific stock you’ve got your eye on – the software will present you with a clear buy, sell, or hold recommendation – and explain why. Timing is everything when it comes to contracts. And if you want help timing your entry and exit into a contract, you need VectorVest.
Learn From Both The Wins And The Losses
There are two outcomes from every trade you make – you win or you lose. Either way, you need to make sure you’re taking key findings away from each outcome. If you win, figure out why – and seek to replicate your success in future trades. If you lost, find out why – and avoid making those same mistakes. Keeping a trading journal is a great idea. You’ll be able to look back and gain insights from past trades to influence future decisions.
Final Thoughts On How To Buy Stock Options
That concludes our guide on how to trade stock options. You now know what is possible as an options trader and how to get started. At this point, there is just one thing to do – register for your crash course and really learn how to trade options at a high rate of success. Be sure to invest in the right stock forecasting tools as well, and you’ll find that options trading is profitable and low risk.