The first steps new traders must take to trade listed options
Listed options trading is a type of trading that allows traders to buy or sell options on a designated exchange. This form of trading has many benefits, including hedging against risks, speculating on the direction of markets, and generating income.
For new traders looking to start trading listed options, traders must take a few critical steps to succeed.
Learn the basics
Before starting to trade listed options, it is crucial that new traders first learn the basics. It includes understanding what options are, how they work, and the different options types. Many resources can help new traders learn the basics of listed options trading. These include books, online courses, and articles like this one.
Choose an exchange
Once you have a basic understanding of listed options trading, you will need to choose an exchange on which to trade. Many different exchanges around the world offer listed options trading. The most popular exchanges include the Chicago Board Options Exchange (CBOE), the New York Stock Exchange (NYSE), and the Nasdaq. You can trade listed options through Saxo Bank.
Select a broker
To trade listed options, you will need to select a broker. When choosing a broker, it is essential to consider commissions, fees, account minimums, and customer service. After choosing a broker, you must open an account and fund it.
Develop a trading strategy
Before starting to trade, you must develop a trading strategy. It will help you decide which options to buy or sell, when to enter and exit trades, and how to manage your risks. You can use many different trading strategies when trading listed options. Common strategies include buying calls, buying puts, and selling covered calls.
Place your first trade
Once you have developed a trading strategy, you are ready to place your first trade. When placing a trade, you must specify the type of option, the strike price, the expiration date, and how many contracts you want to trade. You will also need to decide whether you want to buy or sell the option.
Monitor and adjust your trade
After placing your trade, it is vital to monitor it and make adjustments. It includes monitoring the underlying security price, the time left until expiration, and the option’s premium. If the trade is not going in your favour, you may need to adjust your position.
Disadvantages of trading listed options
Commission and fees
When trading listed options, you will need to pay commissions and fees to your broker. These can add up over time, so it is essential to consider them when making trading decisions.
Liquidity risk
Another disadvantage of trading listed options is the liquidity risk, which is not being able to find someone to buy or sell the options when you want to exit a trade. This risk is higher with less popular options and shorter-term options.
Capital requirements
When trading listed options, you will need to meet the capital requirements set by the exchange. For example, the CBOE requires that traders have at least £5,000 in their account to trade standard options contracts.
Margin requirements
In addition to the capital requirements, you will also need to meet the margin requirements set by your broker. It is the amount of money that you will need to have in your account to cover the potential loss on a trade. For example, if a trader buys a call option with a £100 strike price and a £1 premium, you will need to have at least £100 in your account to cover the potential loss.
Risk of exercise
Another risk of trading listed options is the risk of exercise, which is the risk that the option holder will exercise their right to buy or sell the underlying security. It can happen before expiration, and it may not be possible to close your position before it happens.
Risk of early assignment
Another risk of trading listed options is the risk of early assignment, which is the risk that you will be assigned to buy or sell the underlying security before the expiration date. It can happen when you sell a call option or buy a put option.
