Learn to Trade Options: 5 Steps for Choosing the Right Option

Breaking down how to choose an option with options guru, Bernie Schaeffer

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    In the ever-complex world of the stock market, a beginner may feel lost while trying to understand how to step into trading options successfully. To get started with options trading, it is essential to understand what options are. Using one of the best options newsletters available, like one from Schaeffer's Investment Research, can be very helpful in the process of learning to trade on one's own.

    It can be difficult to navigate through this process and determine the trading strategy that fits your profit goals. Choosing the right options is the most critically important factor in predicting the success of your trading. Because there are a wide range of choices available when trading options, we have compiled this step-by-step guide to helping you choose the right options to trade. You can also opt to join one of Schaeffer's options trading newsletters to earn while you learn to trade options.

    #1 -- Define Your Trading Objective

    After you have decided on the underlying stock that you wish to trade using options, you must determine the profit objective. This is usually the first step that you should undertake in any kind of investment plan, and it is ultimately the most important decision as it will eventually determine how you navigate through the rest of the steps in choosing the right option. Whether you are going for a bullish or bearish outlook, trying to earn by selling option premium, or wanting to hedge against potential downside risk, you need to make this decision before moving on to step two.

    #2 -- Determine the Risk/Reward Payoff and Volatility

    After determining your trading objective, you must decide what kind of risks you can afford to take with your trading portfolio. You should determine your risk-reward payoff dependent upon your personal risk tolerance. Novice traders should steer clear of aggressive strategies such as writing puts. It's important to note here that every options trading strategy has a pre-determined risk and reward profile. You must be sure that you understand the profit potential and risks involved before trading. This should apply to any particular strategy you choose to invest in, even outside of options trading.

    The price of an option is heavily dependent on its implied volatility. High implied volatility attracts traders by pushing up premiums. On the other hand, low implied volatility ensures cheaper premiums for potential traders. The level of implied volatility also plays a key role in determining the options strategy. Traders should, therefore, pay attention to this factor and proceed accordingly. If you want to learn to trade options and grow your portfolio while you grow in your options education, try joining one of our convenient weekend-only options trading newsletters. Our weekend products provide easy-to-execute trade ideas, thorough research behind every trade recommendation, and ongoing education for options traders.

    #3 -- Take Current Events Into Consideration

    Events can significantly influence underlying stocks, as well as their option prices. Whether the event impacts the full market, a specific sector, or a specific stock, when it comes to events it is always recommended that you plan your moves accordingly. So, if you are choosing to buy an options position when an event is around the corner for the underlying stock, be sure to choose an expiration date complements the event date to your benefit.

    #4 -- Choose The Appropriate Options Trading Strategy

    This part can get overwhelming as there are quite a few options trading strategies to choose from. You can start by determining various factors that will decide your strategy for you. These require that you determine your portfolio growth objective, calculate the risks involved, and check the implied volatility of the underlying stock. You can narrow down the strategies you have to choose from based on whether you are taking a bullish, bearish, or neutral posture with the underlying stock. Whether you are an aggressive or conservative trader, the options trading strategy you choose to execute can make or break your profits. If you want to learn to trade options and know the right strategies to choose, we recommend that you opt for an informative options newsletter. With a newsletter like Bernie Schaeffer's Option Advisor, you can make an informed decision regarding the most profitable trading strategy that is appropriate for a given underlying stock.

    #5 -- Check Available Expiration Dates and Strike Prices

    After choosing an options strategy, you have to establish parameters such as strike prices and expiration dates. Your options contract is tied at the strike price and the expiration date determines the trading cycle. Both these will greatly influence your trading experience. You can learn to trade options and decision-making in the investment world with Schaeffer’s Getting Started with Options.

    The process for trading options does have the potential to get very confusing and time-consuming at times. To avoid the confusion and  these, subscribing to the best options newsletter, completely free, will come handy as one grows as an options trader. Here, you will find easy to understand explanations of many different strategies you can benefit from in options trading and the Schaeffer's market outlook for the coming week. An options newsletter can become your ultimate guide to gaining a detailed insight into options trading and learning one you can benefit from the benefits of options trading as a beginner.

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