Options Trading Tutorial

What is the best way to learn to use put or call options?

I use a discount broker to buy and sell shares on line and I think I might like to try put and call options. I am not an accountant or anything and I would like to learn about this kind of investing in simple language.

Public Comments

1. Puts and calls are quite complex and I can't really tell you what you want in simple language. if you do want to learn more about them I suggest a book by John Hull called Options, Futures and Other Derivatives (6th Edition or higher). They are really used for risk management. Investors that successfully use them for speculation tend to be only a handful of sophisticated investors (e.g. hedge funds). Even then many sophisticated investors make a loss on options. My finance tutor used to be head of options trading at Warburg (now UBS), he said that overall he probably only broke even on proprietary trading and that it was hard enough managing delta hedges for clients without screwing up and losing money. As you are an amateur investor I can't stress how bad an idea it is for you to start dabbling in them, given that you suggest that you have very little technical expertise I seriously hope you heed this warning. The only ones who stand to gain are your broker and derivative structurers.
2. Read GETTING STARTED IN OPTIONS by Michael Thomsett. http://www.amazon.com/Getting-Started-Options/dp/0471707120/ref=cm_cr-mr-title/103-8216915-4405457
3. First of all your broker's website should have available "Characteristics and Risks of Standardized Options" which is pretty much required reading before a broker will authorize option trading on an account. Jim Cramer's Book "Mad Money" is written in plain english. Options can be tricky, involve complex strategies, and be counter-intuitive in some respects. Personally I would look at starting with trading in "Covered Calls", instead risking trading on margin and possibly losing a lot of money.
4. Hi Greg, If you want to learn about options, try surfing on over to the Chicago Board Options Exchange web site. They have tons of information including on-line tutorials and courses, webcasts, etc. The site also has a virtual trading platform where you can buy and sell options using "virtual cash". (Look for the Virtual Trade Tool under Trading Tools.) This is an excellent way to try out what you learn about options trading without putting your hard earned money at risk. (I've provided links below.) Once you feel you are ready to really dip in the waters, then you can execute your first options trades using your discount broker. If you are seriously interested in trading options, and don't want to do all of the company research yourself, drop me an email and I will give you the name of the research service that I use. Their track record is quite impressive and thus far, has provided me with significant gains.
5. I took a class at Online Trading Academy in California. I thought it was a little expensive, but the class was EXTREMELY informative and has helped my trading emensely!! I can't recommend them enough. Up to that point, I had read several books, but none of them really help like having a real trader in front of me, working with me on strategies and tactics that books make bland. Hope this helps
6. A few bits of advice: Try selling call contracts on stock you already own. You can often get a good bit of money for contracts that are well out of the money and expire in the near future--for example you can sell a contract on Apple that expires on Aug 20 with a $170 strike price for $75-- Apple's stock has to go up something like 25% in a month for it to be in the money. In general though-- sell contracts that expire in the near future (generally more than 1 month out though, as contracts lose value extremely rapidly during their last month), and buy options that expire in a couple of years. They cost more, but there's a far greater chance that the stock will move significantly over an extended period. Buying contracts that expire in a month is generally a good way to lose money. And especially as you start out, don't bet a lot on any one investment. Good luck.
7. Start with "Options Made Easy" by Guy Cohen. Also, check out 888options.com. That's a free site by the industry that'll teach you all the mechanics of options at your own pace. There's free quizes and everything! Plus, check out their seminar schedule as you might be able to catch one (or more) of their free workshops locally. Start with those items, then practice! Once you've gotten comfortable and consistently made money using options (as a proxy) for stock, you can then start trading options for real. Just be aware that it's even more leveraged than margin, so it'll be a double edged sword. Best of luck!