How to open an option trading account

Many individual investors are fearful of trading options and if you add the negative campaign coming from the traditional brokers the fear only gets bigger. But, the number of options contracts traded has been tremendously increasing year over year. And options are becoming increasingly essential to succeed in a highly volatile stock market like the one we are experiencing now. This brings us to the point of how to open an options account.
Learning to use options effectively takes some time - particularly if you are set in your ways - but market conditions have changed so much in such a short time that you have to make the effort if you expect to both maximize profits and guard against major reversals.

Because of the dramatic changes in the markets, it's no longer enough to merely look for good stocks, buy and hold, hoping for a profit. It is similar to asking for different result from applying same old techniques.
Today’s markets’ success and sustainability depends on your ability to buy quality shares at bargain prices, generate added income while you hold them, hedge against volatile short-term moves and sell your stocks at a premium when the time is right.

Options enable you to do all those things - and more - with many of the techniques I will be detailing on the future articles of our ongoing options learning series.

For maximum efficiency and optimum results, you need a designated options account - preferably one you can access online to get real-time quotes and instant entry of both your orders to the electronic trading systems offering the best prices at any given time.

Many of the full-service and discount stockbrokers have options-trading capability but remain far behind the curve when it comes to options in terms of effective order execution, margin requirements, commission rates and they're often reluctant to grant options-trading approval to anyone who isn't a highly experienced investor.

What to look for?
So, how do you go about finding the right options specialist and opening your own trading account?
You want to look for the following things when you start shopping for an options broker.

Experience requirements
Account minimums
Designated Trade Levels
Commission rates, other fees
Research and analytical tools.

Most importantly, compare the clarity and ease of use of their order-entry platforms - especially with regard to the specific strategies you want to use. For example, if you plan to use a lot of spreads, make sure you can place actual "spread orders" - buying and selling the options in combination, rather than having to price and order them individually.

Trading platform
Some of the online brokers specializing in options trading are providing websites and trading platforms with a variety of instructional articles, strategy tutorials and analytical tools like stock screeners, price charts, volatility ratings and valuation calculators (plus many more). That's on top of the basic quote-retrieval mechanisms for stocks, indexes, some futures and the links to "option chains" - a listing of all currently traded options on a given stock. Some are even offering individual coaching and strategy suggestions based on your existing holdings.

As you learn the ropes and improve your skills, you'll eventually use most of these tools and services, so make sure your broker offers them before you open the account.

Offering of option trading level

Paper trade

Please consider “paper trading” also called as “virtual trading” or “practice trading” before you start your real trading.

Get the experience

Paper trading, paper trading, paper trading - that's the key to learning how option strategies work and how to use them most effectively.

How many strategies?

There are thousands of possible trade combinations using options and various underlying assets, meaning your trading program can be as simple or as complicated as you want to make i

Online brokers specializing in options fully recognize both their potential and their risks. For that reason, these they want to ensure that you have a reasonable degree of investing experience in stocks and other assets - enough so that you understand both the nature of risk and the impact of taking the inevitable loss.
If you are a beginner with minimal investment experience and haven't traded options before, chances are you will be limited to simple buy and sell calls and puts level of trading. Once you familiarize about the markets, various options strategies, the basics of trading "on margin" and the forces that typically drive stock price movements and dictate “option premiums” the higher option trading levels which allow more complex strategies like spreads, straddles, strangles, etc., may be assigned (More about these strategies in the later posts). Typically there are four to six trading levels.

Requirements
Almost all online options brokers will let you open an account with a minimum deposit of $5,000, and some will let you in for as little as $2,000. However, with accounts of that size, the types of trades you can do will be limited - usually restricted to the buying of stock, outright purchases of plain-vanilla "call" or "put" options, the sale of "covered calls" or the positioning of basic bullish or bearish "option spreads."

You may have to put up at least $10,000 if you want employ more advanced strategies and higher-risk-involving trades. (If you want to become a specialist option trader engaging in such sophisticated options strategies, look for the broker that offers strong educational and analytical support.)

Finally, if you intend to engage in really high-risk strategies - such as the sale of "naked" calls on stocks or the writing of index options - you may be looking at an initial outlay of $50,000 or more.

Where to start?
I am listing a few of leading online options brokers. These aren't recommendations and I am no way compensated by these firms for listing them here - just a good starting point if you're ready to expand your trading horizons (just click on the firm name and the link will take you to their Web site):
Optionsxpress – offers very good trading platform with virtual trading facility
Optionshouse – competitive commission structure also offers paper trading
Tradeking – favorable option and stock commission rates
Trademonster - offers paperTRADE™, a practice account you can open and use to test strategies and sharpen your trading skills before actually putting your money on the line.

It is fairly easy and simple to open an account - either practice or real. You can complete all of the "paperwork" online, with the firm's Website walking you through the forms step by step. You can even arrange to fund the account with a direct transfer from your bank so you don't have to send in a check and wait for it to clear.

If everything goes well you should able to place your first trade within a week from opening of your account.

Come back again later for another interesting options learning lesson. If you like my blog posts please Subscribe by Email and never miss any future tips about options trading. Also share my blog post using the Social Bookmarking services below.