Options trading for dummies
Register for an account with your chosen broker; this is usually a simple form on the website and a copy of your ID, this will need to be sent before you can withdraw your funds. Once registered you will need to fund your account with at least the minimum deposit amount. It is important to note that every broker offers a different range of features and you can sign up to more than one broker. As a new trader you should look for a broker who offers a demo account, low deposit and a good average rate of return.
Having created your account you will be eager to start trading. However, you should take the opportunity to study the educational material and learn as much as possible regarding binary trading. Then use the binary options demo account which will allow you to familiarize yourself with the layout of your site before you trade for real. The practice account also offers an excellent opportunity for you to test some of the strategies you should have been learning about. Not every approach will work for you; it is essential to choose a strategy and trading style that you are comfortable with.
You will then be able to maximize your chance of placing successful trades. You can then choose your asset and the strategy you wish to employ. It will then be time to wait! Trades can be for as little as thirty seconds or as long as a year; although most traders choose to operate between one and five minutes. It is important to note that every time your prediction is wrong and you lose your investment, the broker gains your funds.
In some ways this is like gambling as you are playing against the house. However, you are not simply relying on luck!
Even when you place a successful trade your broker is likely to make some funds from you via charges! The average rate of return is in the mid seventies; this means that you need to place successful trades between fifty five and sixty percent of the time; just to cover your operating costs. This is why it is essential to research and understand the assets and the market.
Most experienced traders will use some kind of binary options signals. This can be as simple as a chart showing the rise and fall of an asset over short and long time periods. From this chart you will be able to see a trend and can trade according to that trend. More complex signals involve creating boundaries and even moving average prices. This is often too complicated to deal with when first starting trading. A viable alternative is to subscribe to one of the signaling services. They will inform you which asset to trade on and which direction to trade in.
These signal providers offer a very good success rate and are essential assistance for those with limited knowledge or time. However, they should assist you in increasing your returns and allow you to control the risks your expose your funds to. The more risk you are prepared to accept the more signals you will receive each day! An extension of this, which some brokers allow, is to use an automated trading software.
Remember that buying the option contract gives you that right. Which means the person selling you the contract is actually giving you that right. In both scenarios you are buying low and selling high!
Now when I say you are buying and selling shares, it's not exactly correct. That's called an Option Assignment. And your brokerage firm will charge you a small fee for handling the nitty gritty transactions in the back end.
Option Premium The one thing we didn't talk about so far is how much does it cost to buy an option contract? That depends on two factors. How close the current market price is to the strike price and how much time is left before the option expires. These two concepts are called Intrinsic Value and Time Value. A Call Option is said to have intrinsic value if the current market price is above the strike price.
The rest of the option price is the Time Value. A quick side note about how option premiums are stated. When you see an option price quote, you will typically see the price divided by It's stated that way because one option controls shares.
Don't be confused or mislead and buy more options than you can handle! For a Put Option, obviously the Intrinsic Value would be based on how much lower the market price is relative to the strike price. Time Decay An important factor to consider is the decay of time. The Intrinsic Value doesn't decay, just the Time Value. Buying and Selling Options All this discussion was assuming the fact that you would keep the option contract until expiration.
But the fact is you may not want to. In reality many people do not buy and hold the option that long. If they see an increase in the option they bought they will most likely sell the option and take their profit.
Now you know that as time proceeds the decay in Time Value will decrease the value of your option. So the only way to make money is to hope that the underlying stock moves in your favour. But if IBM's market price increases as well, the decay in time value may be offset.
You can probably guess by now that the closer the market price is to the strike price, the more the option is worth. Now you can wait and see what happens on May 15th, but if you just wanted to take advantage of a short term price swing you can take your profits right now and run. This section about reading options chains has been out dated, but it is still worthwhile to read through because you may still encounter these in various other websites.
Click here to find out the latest method of reading options chains. Now that you know so much about options, lets talk about how to find them and how to interpret what you see. You can look at the diagram below or go directly to Yahoo by opening another browser page and entering the URL http: As you can see there is a table like the one below: The red circle indicates this is for May The first column shows all the available strike prices.
The green circle shows a weird looking symbol. It's certainly not the symbol for IBM, but it looks similar. There is a standard for listing option quotes which you can see by going to the cheat sheet see link on the right hand navigation.
You can probably figure out the rest of the circles if you've seen stock quotes. A couple of things to point out is the pricing standard and the highted area. It is divided by and then listed.
The volume however, has not been divided by anything! It really is The final thing to note is the area highlighted in yellow. Remember we talked about Intrinsic Value? The yellow highlighted options are referred to as "In the money" options. Buyer Beware Until now I've just been giving pure facts about options. Now I'm going to give some advice. You have to be very careful when trading options. People often tout the upside to options investing while playing down the risks involved.
If you watch T. While it is true that you can realize tremendous profits, the chances of you realizing tremendous losses are just as great..