Editor’s Note: Options aren’t as complicated as Wall Street makes them out to be, but we understand that getting started can be daunting. That’s why we’re sharing Tom’s primer, full of quick but insightful tips for beginners, with you again today. Here’s Tom…
We've welcomed in hundreds of new Power Profit Trades subscribers this year.
Many of you have started out with "paper trading" on my picks and are excited at the prospect of pocketing the gains in real time.
Taking advantage of what veterans like me didn't have when we started trading is a great idea! I know it's not like real trading, but one of the things using a "virtual" account will do is help you get familiar with order placement through the platform you intend on using before you use real money.
For those of you already on "live" platforms, congratulations! You're already enjoying gains.
Beginners are also working through the "how to get started" phase of investing. However, the most common question I get is "how do I open an account?"
For those of you not yet receiving Power Profit Trades (keep reading to learn how you can sign up), or for anyone who hasn't traded yet because of concerns over opening a live account, let me take the fear out of what is an easy process.
Just follow my lead…
Since moving to New York City back in the early 1990s, I've witnessed incredible changes in brokerage firms and the financial services industry.
Back then, it took weeks to get an account opened, most trades were done over the phone, and commissions were unbelievably high.
In the last 20 years, however, due to competition and technology, all three of these things have drastically improved for the retail trader. Competition has driven commission prices down to levels that are barely factored into risk and reward these days, and technology has allowed us to get instant quotes and fills in the blink of an eye.
For the new options trader, it all starts with opening your first options account. The good news is that opening up an options account online is quick and easy.
But before you get to that step, there are a few things you need to understand first.
Before You Begin
Most traders seeking to trade options already have a stock brokerage account. Before you place a call to your broker or go online to start the process of opening an options account, make sure you want to trade options through your brokerage firm.
I've used this pattern to show my readers triple-digit gains in one or two days. Click here to learn more…
There are stock firms that offer options trading, and then there are options firms that offer stock trading. I like the latter, because an options firm knows what a client needs and hasn't just programmed together an options platform on the side of their equity trading.
Option firms build their platforms from the ground up, in many cases offering easier and more streamlined platforms in which to trade. Commissions are generally lower as well, as they are looking for active traders.
If you are a new options trader or a position trader, meaning you hold trades for periods of longer than 30 days, then it might make sense to use a web-based platform rather than a streaming one.
Web-based platforms are great for someone getting started. The OptionsXpress platform is easy to master, from simple option purchases even up to three- and four-legged spreads, and it’s set up nicely in a step-by-step format when it comes to placing an order. The drawback on platforms such as this one, though, is that they are more of a snapshot of the market, rather than constantly streaming.
The chart below comes from ThinkorSwim, TD Ameritrade's active platform. Now, this one has all the bells and whistles and can chart and analyze stocks on the fly in real time. It also allows you to set up real-time scans and indicators, with alerts to let you know if a bullish or bearish trade signal is present.
All this excitement does have its drawbacks. Entering orders on a real-time platform can sometimes be a bit daunting with everything that's happening on the screen.
Which is right for you?
Whether you decide to go easy (web-based) or go crazy (computer-based) is all up to your experience level and how smoothly you flow through computer screens. If you are a computer novice, a web-based platform should suffice. If you were the pinball wizard of your day, then perhaps an active trader platform is for you. If you’re not sure, you could start with a web-based platform and graduate to an active trader platform when ready.
Getting Past the Questions
Opening an options account feels a bit like an inquisition, involving many questions that seem to say the same thing… liability and risk. The way these are answered will determine if (a) you get authorization to trade options, and (b) what level of options trading authority you qualify for.
About the Author
Tom Gentile is one of the world's foremost authorities on stock, futures and options trading.
With more than 25 years' experience trading stocks, futures, and options, Tom's style of trading systems and strategies are designed to help individual investors propel themselves past 99 percent of the trading crowd.