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Getting started with Options

Published on Wednesday, April 4, 2018 | Modified on Monday, May 28, 2018

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Ready to trade in options? Brilliant! Now that you have a basic understanding of how options works, its benefits and risks, factors that affect its pricing, options greeks and popular options pricing model- you're set to trade in options.

Still, there are a few things you need to do before taking the plunge into options trading.

Set your goals…

What do you wish to accomplish in options trading? People trade in options to accomplish various goals. Some invest to earn profits from them or make money. Some trade in options to insure or protect their investments in the underlying instruments. Say, you have a big investment a particular company and you buy options to protect yourself against any market downturn. So pick your goals.

Decide on your strategy…

Once you have set your goals, you need to decide on the strategy to accomplish your goal. There are strategies to help you make an income on your options investments and there are different strategies to help you insure your investments in underlying stocks. So, depending on your strategy and your risk-taking ability, you need to pick the right strategy for you.

Choose a brokerage firm

Generally, investors start trading in shares and then move to investing in options. If you are already availing services of a brokerage firm then check with them if your current trading account qualifies for options trading. In case, you want to choose a new options broker for trading then here are a few major considerations-

1. Technology

Trading platforms, mobile apps etc., have become critical to options trading today. So, one of the major criteria for selecting a brokerage firm is its technology infrastructure. Check with the brokerage firm on the trading platform it uses, whether they have a mobile app for you to trade on-the-move etc.

2. Brokerage

For every transaction on options, broking firms charge brokerage + taxes. The brokerage is not a standard rate and depends on your relationship with the firms and the volume of your trade. So check with the brokerage company on its brokerage slabs based on trading volume. If possible, negotiate for a lower brokerage rate.

3. Services

While most investors, choose a brokerage firm based on its brokerage rate, it should ideally be based on brokerage rate + services offered. There are small brokerage firms that don't offer services like orders via phone, research services etc. but charge a lower rate. On the other hand, established brokers offer various services to assist you in trading and charge a higher rate. So compare both services and rates and then pick your choice.

Prerequisites to invest in options

Trading in options is very similar to trading in the stock markets.

You need:

  • A trading account
  • Margin maintenance

Unlike stocks, when you purchase options contracts you are required to pay a percentage of the options value called premium.

In addition, particulalry when you are selling options, you need to maintain a margin which is marked to market in your account. Margins on Options contracts include:

  1. Initial Margin
  2. Exposure margin

In addition to these margins, following additional margins are collected:

  1. Premium Margin
  2. Assignment Margin

All the margin amounts are decided by exchange and you're informed about it at the time of buying the option. A failure to maintain margin in your account may lead to penalties being levied in your account. So keep an eye on your margin money.

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