Here it is. The most important piece of advice I have for anyone thinking about options trading.
Don't let the red tape hold you back.
A lot of experienced and sophisticated investors shy away from anything that involves paperwork.
They think they're not qualified or ready, or simply that it's not worth the trouble.
Don't be one of them.
Yes, you will have to fill out an options application with your broker, but it's easy.
In fact, you had to file a similar form just to open your trading account in the first place. Now, if you want to upgrade your account to be "options approved," it's just another small step away.
Admittedly, the application may look intimidating at first glance. It is full of disclosures, legal qualifications and the kind of small print that is worrisome.
Yet the purpose of the application is simple enough.
Your broker just wants you to state that you know enough about options to make your own trading decisions.
And not to worry... It's not a quiz.
The disclosures are designed to gauge your level of experience. But their real goal is to let the brokerage firm off the hook in case things go terribly wrong. Of course, that's not going to happen to you.
But if a broker lets anyone trade without at least appearing to check them out first, they could be liable for your losses. And no one wants that.
Because options are by definition speculative, the New York Stock Exchange (NYSE), Financial Industry Regulatory Authority (FINRA), and National Association of Securities Dealers (NASD) all have rules and policies about "suitability."
That's the real reason you have to go through this (very small) hoop.
So you'll fill out the application. They file it away into the "just in case" drawer and you're ready to trade.
What's on the Options Trading Application?
The options application will ask some questions you would expect: Name, address, employment and employer name, annual income and all sources of income. They also want to know your net worth and liquid net worth, marital status and number of dependents.
Then there are a few questions you might not expect.
credit spreads options
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Options Trading: The Most Important Piece of Advice for Beginners
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Options 101: Credit Put Spreads Can Boost Your Gains and Lower Your Risk
Last month, Money Morning showed you how to use a technique called selling "cash-secured puts" to generate a steady flow of cash from a stock - even if you no longer own the shares.
It is a highly effective income strategy that can also be used to buy stocks at bargain prices.
But selling cash-secured puts does have a couple of drawbacks:
It's called a "credit put spread" and it strictly limits both the initial cost and the potential risk of a major price decline.
I'll show exactly how it works in just a second, but first I have to set the stage...
It is a highly effective income strategy that can also be used to buy stocks at bargain prices.
But selling cash-secured puts does have a couple of drawbacks:
- First, it's fairly expensive since you have to post a large cash margin deposit to ensure that you'll be able to follow through on the transaction if the shares are "exercised." Thus the name, "cash-secured" puts.
- Second, if the market - or the specific stock on which you sell the puts - falls sharply in price, you could have to buy the shares at a price well above their current value, taking a substantial paper loss.
It's called a "credit put spread" and it strictly limits both the initial cost and the potential risk of a major price decline.
I'll show exactly how it works in just a second, but first I have to set the stage...
To continue reading, please click here...