Options Trading Tutorial

What are the requirements to trade options if you use an online broker like Scottrade?

Im a 21 college student and have decided to take a small amount of risk in the market, perhaps trading options. I have an account with the online broker Scottrade that has a value > 25000. I turned in the paperwork for trading options. So if I were to invest a small amount of my portfolio into a call option for (X) tomorrow morning, what steps do i need to take (besides filling out the order form i know how to do that)? Do I have to own shares in (X)? Also it's a $1.25 per contract, so does that mean for each single option I buy it cost $1.25? I just started a course in investments and will learn more about options later this semester, I just want a head start and possibly make some money. Thank You.

Public Comments

1. Options both put and calls are traded in 100 share blocks so if you buy and a call option in XYZ for say $ 1.25 you mentioned at a strike price of $25.00. Then you will pay $125 plus commission for this. The option has a length of time that it is good for and it will move up or down with the price of the stock. Remember you have the right to buy the 100 shares at $25 so you will have a basis fo $126.25 (plus commissions ) should you exercised it. You can always sell the option (close your position) prior to the experation date. The closer to this date the more the option will decline in value - time value of money effect. Option trading is very difficult and not a good way to start, you might want to just practice trading them for a few months using the Yahoo portfolio manager before you dive in.
2. I think, Scottrade is quite strict when you're applying to trade options. I just wanted to buy puts and calls. I filled out an application form and was rejected. So, I opened an account at optionsxpress.com. They allowed me to trade options without a question. Their commission fee is $15/option trade, which is not bad. You do not have to buy the stock in order to buy a put or call option. (You may buy the stock, if you want to, but if you don't buy it, that's okay too.) 1 option contract = 100 shares (So, if you want to buy one option, you're actually buying 100 shares of the option. You cannot slice the option and say "I want to buy 185 shares of this.") If you buy one, then that's 100 shares. So, if the price of the option is 1.25, then one option contract will cost $125 + commission.
3. I suggest that you acquire options trading knowledge and paper trade first before using real money. You do not necessary own shares to trade options. 1 contract = 100 shares (In US market) or 1000 shares (in Australia market). $1.25 per contract will mean $125 in US market or $1250 in Australia market. For call or put options, there is a strike price and time expiration to consider when buying along with stock price. Implied volatity also played a big part in options trading.
4. Requirements: Generally brokers have different options approval levels-- the lowest level allows you to sell options on stock you already own, the second level allows you to buy calls or puts, and the last level allows you to sell options on stock you don't own. I suspect that any broker will give anyone with at least a modicum of stock experience the right to sell options on stock they already own (this is called a covered call.) Since you're merely agreeing to sell property to a person at a certain price, this is fairly safe and you generally cant get into too much trouble. Buying long calls and puts is riskier, and your broker will probably expect you to have experience trading stocks and options before letting you pay with these. Selling options on stocks you don't own (naked calls or puts) can be extremely dangerous and brokers will expect you to have a good deal of experience before approving you. Personally I like selling calls on stock I already own. Buying options is a good deal riskier, and I'd advise you to start out with extremely small sums. Also I'd advise buying relatively long term options, as these give the stock you own more time to move dramatically in the direction you want. And generally brokers charge a flat fee for buying options, plus a smaller fee for each contract purchased (for example etrade is 9.99 + 0.75/contract) Finally try tradeking or zecco. They're both very inexpensive, and seem to be pretty willing to give out options approval through at least level 2.