Options are the contracts that offer the bearer the rights, but not any obligation, to either sell or buy an amount of certain underlying assets at predetermined prices or before contract expiry. Similar to other asset classes, options can be bought with the brokerage investment accounts. The ability to enhance the portfolio of an individual makes options powerful. With that being said, here are a few frequently asked questions about options trading.
What are the four options trading levels?
Most brokers tend to assign separate options trading levels’ approval depending on the complexity and risks involved. The four strategies mentioned here all come under the most basic level, level 1, and level 2. Typically, customers of the brokerages will need to get approvals for options trading until a particular level and have a margin account.
- Level 1 – Protective puts and covered calls, when the investor is already the owner of the underlying assets
- Level 2 – Long calls and puts that also involve strangles and straddles
- Level 3 – Options spreads that involve purchasing one or multiple options and simultaneously selling one or multiple options of the same underlying
- Level 4 – Selling naked options that mean unhedged, which comes with the chance of unlimited losses
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How to start trading in options?
Today, most online brokers offer option trading. Typically, you’ll need to forward an application for options trading to get an approval. You also need to have your margin account. After getting the approval, you can enter orders for option trading in the same way as you would do for stocks.
However, you need to use an options chain for identifying which strike price, expiration date, and underlying to go for, and whether it’s a put or a call. You can put market orders or limit orders for that option after that.
When does options trading happen in the day?
Options on stocks (equity options) trade at the usual stock market hours. Typically, it is 9:30 a.m. to 4 p.m. EST.
Where does options trading take place?
Listed options always trade on specialized exchanges like the Boston Options Exchange, the International Securities Exchange, the Chicago Board Options Exchange, and so on. Nowadays, the exchanges are mostly electronic and platforms like Tesler have taken things online. The orders that are sent through the broker will get routed to one of the exchanges for the best execution.
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Can options be traded for free?
Although most brokers now provide commission-free stock trading and ETFs, trading in options still involves commissions or fees. Typically, there is a fee per trade, along with a commission for each contract. For instance, fee per trade can be $3.95 and the commission per contract is $0.60. Thus, when you purchase ten options under the options pricing structure, for you the cost will be $3.95 + (10 x $0.60) = $9.95.
The endnote
Like all kinds of trading instruments, options trading comes with its own set of risk and rewards. So, make sure to contact your broker before you proceed further.
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