Investing 101: Options Brokers Guide
The cutting-edge investment strategies in the 21st century have mostly been associated with trading mutual funds, stocks, and bonds. However, a rarely sought after form of securities trading has emerged and similarly become a considerable approach for many experienced and inexperienced investors.
Unlike stocks, bonds, and mutual funds, trading options remain versatile. This is because they can easily be adapted or adjusted to correspond to situations arising from speculative trades. The point is that options are conservative thus allowing you to execute sales or purchases depending on market’s performance.
The reason why most investors may prefer avoiding options has been associated with their volatility and insecurity. Expert reviews indicate that the complexity of options articulate to their high-risk characteristics.
Regardless of your past expertise on trading options, as long as the market keeps changing, you will find yourself requiring immediate assistance from an expert. Such kind of an expert could be an individual broker with knowledge on options trading or can also be a common brokerage firm whose staff members are equipped with the required skill sets to trade these high risk and speculative securities.
In order to understand the role a broker would play when representing an interested investor on options, it is important to understand options basics.
What are Stock Options?
Options can be described as contracts that offer buyers opportunities but not the obligations to execute a sale. This sale can be conducted before an already established expiration date runs out.
The two major types of options are calls and puts. Calls give the securities holders a long position thus allowing them to conduct purchase over a given period of time. Subsequently, an investor on calls would hope that the stocks on sale will go higher before the set amount of time expires. Puts, on the other hand, are the opposite of calls and usually give the holder short position within a stock on sale. Investors on puts will, therefore, hope that the value of a particular stock will go down before the set period of time expires.
A seller of options is referred to as a writer, while a buyer of options is referred to as a holder. These two categories of investors work hand in hand and try to figure out market changes by the aid of skilled options brokers.
Like any other industry, the options market is filled with jargon. An options trader, therefore, needs to understand what certain terms may stand for. For example, the strike price is the cost price of a stock. This is the minimum set price in which that particular stock can be sold or bought. For calls to make profits, the strike price is expected to go higher, while the same would be expected to go lower if puts were to make profits. The sales and purchases must all be conducted before the end of the expiration date.
Listed options are very common as traded at national options exchange. These types of options are made up of fixed expiration dates and strike prices. Listed options are made up of contracts. The commonly used figures on company stocks for the contracts are 100 shares of each. For beginners, terms such as premiums would be new to them when trading options. A premium is a total amount at which an option is trading for. Premiums are therefore dictated by the price of the stock, the strike price as well as time before the expiration of an option.
Why you should trade stock options
The two major reasons as to why investors embark on trading options are for speculation and hedging purposes.
Generally, when you choose to gamble by guessing the most anticipated movement of a particular security, this is called speculation. Options allow buyers or sellers to identify the loopholes in the market and capitalize. The only problem with speculation is that you can either win big or lose big hence the nature of high risk on such occurrences.
Hedging on trading options can be linked to an insurance policy. Since options act as contracts that can be executed based on price changes in the markets, they play a key role to safeguarding the interests of the investor. While this does not limit losses completely, the ability to put some money against a particular stock owing to the fact that it could go up to your benefit as the buyer or drop to the benefit as the seller gives a hedge to counter any major losses.
There are tons of brokers out there claiming to offer the best options brokerage services. This article, however, provides an opportunity for the novice to choose a qualified broker. Some of the big giants in the options trading industry include options-house and TradeKing among others.
Options-house is a recommended choice for options traders who would utilize features such as the opportunity to trade for 90 days at no commission, an educational platform that allows beginners to understand market behavior as well as more currency options to trade.
TradeKing, on the other hand, would be ideal for traders who prefer not to gamble by trading higher. It also contains an easy to master platform and a trade network that is revered as a community base for exchanging ideas.
The two options brokerage firms target a different category of clients but the end results remain the same. The biggest challenge, however, lies with choosing the most profitable.
In order to choose a commendable broker or options trading platform, there are a few factors that both the buyer and the seller of options would be looking for. The first thing is the ranking structure.
According to expert reviews, there is nothing like a better options trading broker or brokerage firm. The only difference between one firm and another are the requirements that the buyer or seller of options is looking focused to find. For this reason, the general public is advised to select an options broker based on their interests. The following factors will act as a guide when choosing a profitable options broker or brokerage firm.
Factors to consider when choosing an Options Broker
The most important factor to consider when searching for a competent options broker is the relative trade that you wish to execute. The trade will be dictated by a number of options that include: full service, commissions, minimum trades and customer support.
In the past, brokers were available under two categories. They could be contracted as full-service representatives or discount-oriented brokers. However, the influx of online brokers has combined these two options into one thus making it difficult to distinguish them. A discount broker follows your requirements and executes them based on the agreement that you both set while a full-service broker does more than just following your orders. He or she is supposed to provide you with professional guidance into buying or selling options as well as transact orders as instructed.
While in the past traders could focus on either of the experts, today, the merging of two categories has helped them expand their reach. In other words, you can choose whether you would like to explore additional services offered or just stick to the contract details. For example, do you wish to be guided on the best path to take when it comes to potentially profiting trades? Or would you find it profiting to your side by just directing the broker on what to do? Generally, you might find that this flexibility could go both sides, either provide you with an edge to make profits or also end up incurring substantial amounts of losses.
Existing players in the market, based on past experiences have come forward to identify that beginners on options trading need to utilize full-service brokers until they understand the tricks involved in the market. But this doesn’t suggest that beginners cannot make use of discount brokers when buying or selling options since they need to understand the basics involved in both categories of brokers.
Unlike trading options, a broker for trading stocks and shares would rather be full service because the trader stands to benefit. This is because all the brokerage resources are pulled together to help direct profits regardless of market price changes. It is recommended that an options trader stays hands on while learning how each of the trading opportunity can be applied. When he or she has mastered most of the tricks involved in trading options, they can now focus on utilizing discount based options brokers. This is because they would be a lot more affordable and easy to manage since you are cost sharing the work.
A small trader on options should consider utilizing the services of a brokerage firm offering adjustable commissions based on the capacity of the trader to match them. Brokers offering competitive commissions are most likely going to be signing new beginners in options trading than those promising high profits at the cost of charging higher commission fees.
The fee structure offered by a given options broker should be simple and straight forward. If the structures are too complex to understand expected profit margins, it would be best you focus on buying services from experts who have simplified this option. For example, take a brokerage firm offering considerable commissions and fees, but at the same time also indicating that lower commissions can be met by meeting certain criteria? Well, this convoluted information could contain hidden fee structures that the trader did not expect hence the need to utilize those brokers whose structures are low, open and straight forward.
Some companies will also offer lower commissions but charge you higher withdrawal and money transfer fees.
Whether you are dealing with an online service provider or an individual broker that you trust, as a new trader for options, you need to ensure that minimum trade value and minimum deposit amounts are not fluctuating every time. A fixed minimum translates to the amount of money you may need to deposit to your account before you start trading. The cost per trade is very important although depending on the broker that you have signed with, you may find that the same trade would be a lot cheaper when buying it through another broker.
What happens with the price is that one trader may have minimized on the cost of the trade but taken that extra cost and added it elsewhere within your account. For this reason, it is recommended that you focus on executing smaller trades that will not carry unimaginable prices especially if you are new in trading options.
If you are within the capacity of spending more on your investment, then you need to utilize a broker offering lower minimum deposits and trades. A trade value is the amount of money that you will be spending on a given trade. Whenever you trade options, you need to be able to execute trades based on the minimum trade values and minimum deposit amounts that you would be comfortable with.
Summary on choosing a good options broker
Locating a broker for options trading is not hard, the only challenge relates to finding an options broker that will be fitting to your requirements. Since many brokers offer different types of platforms and features from their online sites, you need to spend some time researching to understand which one of them offers services depending on your requested minimums and commissions.
Options are categorized as some of the most evaded instruments of securities trading. But once understood; they are versatile and profiting. The nature of options offers traders the flexibility to play around with market values while at the same time leveraging on risks incurred by hedging. The outcome will translate to boosted returns on investment.
In general, you will be able to observe the market from all angles thus making profits from the upside from the downside as well as along the sideways of the securities market. A trader of options needs to be able to manage risk, exercise patience and possess a high concept of price speculation as and when the market changes.