What is option trading? Am I Eligible for options trading with my broker?

Buying and selling options is a risky business and not meant for the average trader of stocks. You need to follow the markets closely and be ready to act immediately. An option is a contract to buy or sell a specific financial product. The contract calls for a specific price, the strike price, and at that point the contract can be exercised. There is also an expiration date for the option, and when that occurs, the option no longer has value and does not exist anymore. Options have 2 varieties - calls and puts. Either type can be bought or sold. If you buy a "call" then you have the right to buy the underlying instrument at the strike price on or before the expiration date. If you buy a "put" you have the right to sell the instrument on or before the expiration date. As the owner of the option, you can also sell the option to another buyer during the contract. If you write, or sell, an option, you are still obligated to fulfill your side of the contract if the holder wishes to exercise. Finding an option trading strategy is something you should discuss with your brokerage firm.

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When you fill out an "options agreement" with your brokerage firm, they will determine the level of options trading you can get involved with based on how knowledgeable you are with trading stocks in general and option strategies specifically. Most investors are not allowed to trade every kind of options strategy because of the high risk involved in options trading. Brokerage firms need to protect themselves against novice or insufficiently funded investors who could end up defaulting on margin accounts. Learning about option trading is what all investors need to do before getting involved in actively trading options. There are lots of seminars that come through metro areas each month and speakers discuss "option trading" strategies and know how. Be careful not to invest directly with these individuals or give them money to invest for you as often these are "fronts" for scams or get rich quick schemes. We suggest starting with a few good books at Amazon.com like The Option Trader Handbook : Strategies and Trade Adjustments (Wiley Trading) by George Jabbour or Options as a Strategic Investment by Lawrence G. McMillan. You can even review websites on the topic at OptionsStrategist.com or OptionSmart.com. They both offer in depth reviews on trading options online, option trading strategies, future option trading, commodity option trading, and basic option trading systems.

Benefits and Risks of Option Trading:

Every website we went to that talked about option trading all used the exact same verage on the risks involved - trading should be conducted with risk capital only. Don't put your life savings into trading options and futures. Sure you can leverage your money by buying options with less money than you would have to put out for stock purchases, but with high risks involved, you could end up having to put out a lot more than what you initially paid for the options. There are benefits of course with upside potential being just as large and that is why trading options is a tricky business. It's not something you should try if you are just getting involved in the stock market. Learn about option trading first and get weigh all the risks/benefits associated with them.

Where do I get an account to trade options - Option Trading Software

All major brokerage firms and stock trading firms offer options trading accounts. You can check out Fidelity.com, Etrade.com, Scottrade.com, or Tradeking.com. What truly sets option traders apart is the vast source of statistics they need to keep up on a daily basis and that is where the option trading software comes in to play. Many of the larger brokerage houses supply this software free when you trade with them online, but having read reviews on these types of option trading software, people say they would rather use 3rd party option trading software for the best results. Several companies have software for option trading like Optionvue.com, Essextrading.com, and Optionetics.com. You get option trading software (futures trading software), futures trading systems, options education, options research, and much more. Again, we ask that the reader be warned that many of these software trading systems were $1000+ and obviously don't guarantee results.

Can I purchase options on margin?

You are not allowed to purchase options on margin like you can with stocks. Some brokerage firms make it mandatory that certain options transactions, like writing uncovered calls, happen in a margin account. Therefore, if you write a call, you'll have to keep a balance in your account to cover the cost of purchasing the underlying stocks if the option is exercised. This margin requirement for uncovered writers is set at a minimum of 20% of the underlying security minus the amount the option is out-of-the-money, but never less than 10% of the security value. If the value of the assets in your margin account drops below the required maintenance level, your brokerage firm will make a margin call, or tell you that you need to add money in order to meet the minimum requirements. If you don't take the proper action, your brokerage firm can liquidate assets in your account without your consent. Options can change in value over a very short period of time, and that is why it's important to watch your account and prevent being caught by a margin call.

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