One of the best ways to practice options trading is by paper trading options.
Trading options can be one of the most lucrative ways of playing the stock market, but it can be confusing if you're just getting started.
That's why we want to help you get the hang of options trading and learn how to make real money with tested options trading strategies.
Even if you have little or no experience trading options, you can still practice in real time. This is called paper trading. It is a great way for you to put book learning to the test in the real world without risking any money at all.
Paper trading, of course, is a legacy name that originated when beginner options traders used paper and pencil to make pretend trades.
Most online brokerages, such as ThinkorSwim, Interactive Brokers, and Ally Invest, offer the ability to practice your skills online without risk. And trading takes place during regular market hours using real bids and offers available at that time.
You can buy an option, track its progress, sell it when you wish and record your performance. And you can do it over and over until you feel comfortable enough to try it with real money.
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Paper trading on one of these platforms is the best way to learn options trading because you must enter your orders just as you would do in real trading.
Of course, not everyone has access to these platforms or wants to use them. Don't worry; you can still practice the old-fashioned way by picking an option and tracking it manually. It is easy to follow along, too, as you can find actual price data online, even if it is delayed 15 or 20 minutes. You do not need real-time pricing in order to practice.
If you are doing it on your own, we recommend that you create a spreadsheet to keep track of all your trades and watch over all your positions. If you know your way around a computer, you can even link your spreadsheet to whatever quote vendor you may use to automatically update prices. But just recording your purchase and sale prices by hand and following their daily changes can be enough to show you if your strategy is working.
You will find that this process can actually be fun, especially if your paper profit and loss results are good.
When you master the simplest of options trades, you can move on to the next level using spreads. This is an options strategy in which you buy two options for the same stock but with different strike prices or different expiration dates. You can experiment to see what the best parameters are.
After you gain this skill, you might be ready for the real thing. Just remember, when real money is on the line, you will have to keep your emotions in check. This is why it is important to practice first, have confidence in what you've learned, and continue to hone your skills further.
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