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Options Trading Education

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How To Learn Stock Options Trading: Stock Options For ‘Dummies’

Would you like to learn stock options trading but don’t know where to start?

Well we’ve got your back and designed this step by step guide on how to educate yourself in the art of in trading options.

(Oh, and we’re sorry for calling you a dummy…).

Learn Stock Options Trading

Table of Contents

  • Step 1: Learn How Options Work
  • Step 2: Understand The Options Greeks
  • Step 3: Learn Some Basic Options Strategies
  • Step 4: Open an Options Broker Account
  • Step 5: Trade With Real Cash
  • Step 6: Keep Learning

Step 1: Learn How Options Work

Before learning the tools of the trade – the strategies and tactics traders employ – you need to know some of the theory of options.

Don’t worry, you don’t need a degree in advanced mathematics. But you do need to know how options are designed and some of the key terms.

In particular you should understand:

  • what call and put options are
  • what is meant by an option’s strike price.
  • how to read an options chain.
  • what is implied volatility
  • what is meant by in the money/out of the money options
  • the role of an options broker

We’ve put together a post to help you to learn these important parts of how options work here

Step 2: Understand The Options Greeks

The next important lesson is to learn all about the options ‘greeks’.

Named after greek letters, these describe how an option’s price is effected by the movement of an important variable:

  • Delta: How options price moves with changes to the underlying (usually a share price, but not always)
  • Gamma: How delta changes with changes in price to the underlying
  • Theta: How options prices change over time
  • Vega: How options’s prices change with expectation of future volatility (or implied volatility)
  • Rho: How changes in interest rates change options pricing

We have a more detailed guide on the options greeks here.

Step 3: Learn Some Basic Options Strategies

The are a few basic strategies to start out with. For each strategy its important to know when to put them on – what are you looking for?

(Actually, as you will discover, a better strategy is to work out what you think will happen to an underlying and then find a strategy to match).

The first two simplest strategies are the buying of a call or put option (the first of which is explained in more detail here).

Then you’ll want to look as some basic options spread strategies. We’ve covered these in more detail elsewhere but in summary you should start with the following spreads:

  • Vertical Call and Put Spreads
    • Involves the buying of a call/put at one strike price and the simultaneous sale of the same type (call/put) at a different strike price.
    • Often a cheaper and or less risky way of benefiting from stock movements than buying or selling just one option.
    • The main strategies to learn are the bull call spread (see here) and bear put spread (covered here).
  • Covered call
    • The sale of a call option (usually) at a strike price higher than the stock price, whilst simultaneously owning the underlying share.
    • More details can be found here.
  • Calendar Spread
    • Involves the purchase of a long dated option followed by the sale of a shorted dated one at the same strike price and pver the same underlying.
    • Unsually placed at the money (ie the strike price chosen is close to the stock price) to take advantage of time decay (the spread is positive theta and will increase in value over time) when the stock price is not expected to move significantly.
    • See here for more details on calendar spreads.

Step 4: Open an Options Broker Account

Options brokers, often owned by stockbrokers,  facilitate the purchase and sale of stock options.

We’ve covered them in more detail here.

Once you’re up and running with an account you should practise trading using ‘paper trading’ (ie ‘pretend’ trading using nominal money rather than real cash – most brokers offer this facility).

Step 5: Trade With Real Cash

However good trading with ‘paper’ money you are, there’s no substitute for using real hard cash to trade.

Deposit a (small) amount – one that you can afford to lose – into your broking account and trade. This is where you really learn how to trade options.

Step 6: Keep Learning

Keep reading and trading and persevere. In no time you’ll be trading like a pro…


Further Reading On Options Trading...

Strangle Spread: A Guide To This Options Trading Strategy

The Strangle Spread Options Trading Strategy Introduction Options, and combination trades such as the strangle spread, can be a very useful tool for both novice and seasoned traders and investors ...
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The Synthetic Covered Call Options Strategy Explained

What Is A Synthetic Option Strategy? A synthetic covered call is an options position equivalent to the covered call strategy (sold call options over an owned stock). It consists of ...
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Options Trading Strategy: Butterfly Spread

Introduction To Butterfly Spreads Options can provide traders and investors a tool for expressing different market opinions. Options can be used to make trades based on market direction, to bet ...
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Options Trading Strategy: Bear Put Spread

Introduction Options can be an extremely useful tool for short-term traders as well as long-term investors. Options can provide investors with a vehicle to bet on market direction or volatility, ...
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Options Rho: Sensitivity To Interest Rates

Rho is the sensitivity of an options's price to changes in interest rates. It is usually only worth considering for long dated options such as LEAPS. Rho is the least ...
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Implied Volatility

What Is Implied Volatility? Implied volatility (IV) is one of the most important concepts in options trading. Unfortunately it’s also one of the most complex. Therefore, let’s build up the ...
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Options Spreads: Put & Call Combination Strategies

Options Combinations Explained Options spreads involve the purchase or sale of two or more options covering the same underlying stock or security (ref). These options can be puts or calls ...
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Options Greeks: Theta, Gamma, Delta, Vega And Rho

The options greeks - Theta, Vega, Delta, Gamma and Rho - measure option price sensitivity to changes in time, volatility, stock price and other parameters. In the world of finance, ...
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Options Vega Explained: Price Sensitivity To Volatility

Options Vega is the measure of an option’s price sensitivity to changes in volatility. It is the expected change in options price with a 1 point change in implied volatility ...
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Buy to Open vs Buy to Close

What is Buy to Open vs Buy to Close? We look at these two similar, but not exactly the same, concepts. There are two ways you can participate in the ...
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Options Trading Strategy: Iron Condor

Introduction Options are highly versatile financial instruments. They can be used to bet on market direction, to bet on changes in implied volatility or even to collect premiums. Options can ...
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Out Of The Money (OTM) Options Explained

Out of the money (OTM) options: where the exercise price for a call is more than the current underlying security’s price (or less for a put). This is an example ...
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Options Trading Strategy: Long Put

What Is A Long Put? A long put option strategy is the purchase of a put option in the expectation of the underlying stock falling. It is delta negative and ...
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Options Trading Education

Options trading is a potential lucrative sideline for those willing to put in the effort. Epsilon Options is here to help you learn the skills you’ll need to become a ...
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Options Trading Strategy: Bull Call Spread

The Bull Call Spread: A Bullish Options Strategy Introduction The bull call spread is a simple strategy that can be used by novice options traders to bet on higher prices ...
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Featured Posts:

Options Spreads: Put & Call Combination Strategies

Protective Put: This Defensive Put Option Strategy Explained

Options Greeks: Theta, Gamma, Delta, Vega And Rho

How To Learn Stock Options Trading: Stock Options For ‘Dummies’

LEAP Options Explained: What Are They And How Do They Work?

Options Trading Strategy: Butterfly Spread

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