Three Things to Know Before You Trade Options

Investing with options isn’t easy to get started with and there are costly mistakes that can happen if you do not know what you are doing.

Often options traders were independently as self-directed investors. This means they don’t work with a financial advisor to manage their options trading. Trading this way gives you full control over your decisions and transactions.

Here are several things to know before you get started.

1. Predict how the stock will change. Will it go up or down?

2. Calculate how much you believe the stock price will change. This will help you determine which contract would be worth buying.

For a call option you would want a strike price that is below the current market value and with a put option you would want a strike price above the current market value.

3. Choose an expiration date. You must predict how long you think it will take for the stock’s value to hit your strike price. Expiration dates can range from as little as days to years. As a beginner you should stick to long-term expiration dates. The more time there is, the more time the stock has to move. Also keep the following in mind. Trading options can be complicated and even overwhelming. Options have a limited worth and as more time passes, the less your contact is worth. Once the contract expires, it becomes worthless. If you let the contract expire, you will be left with a loss equal to the premiums that were paid.  But also know that the longer you have until the expiration date, the higher the time value.