It is not a requirement to own stock to buy stock market options. In fact, stock options, puts and calls, can be used as substitute trading securities in place of stocks. Using options to trade the stock market gives the trader a wide range of strategies, from simple to very complex. Strategies are available to profit from rising stock prices, falling prices or prices going nowhere. You will need a stock brokerage account to buy and sell option contracts.
1. Open a brokerage account with options trading privileges. Getting an option account requires two steps: opening a brokerage account and applying for option trading authorization. The option trading part requires a separate application and disclosure. The broker will give your account an option trading authorization level. The levels go from 1 to 5, based on your financial assets and trading experience. A higher level allows more complex and risky trading strategies.
2. Familiarize yourself with the broker's option trading system. You need to be able to find option chain pricing for individual stocks, select specific options for purchase or trading and complete trade orders using the broker's options trading screens.
3. Select options to buy and place the orders using the broker's option trading system. The straight purchase of put or call options is the simplest option strategy. Call options gain value if the underlying stock goes up, and put options profit from a declining stock price. Remember, the cost of one option contract is 100 times the quoted price. If the option you pick is quoted at $3.50, the cost will be $350 plus commissions.
- Use the Barron's annual broker survey to find brokers rated highly for option trading.
- Select a broker who offers a simulated-money practice trading account. Use the practice account to learn the mechanics of buying and selling options. Also, spend time with the practice account developing and perfecting your own options trading strategy.
- The Chicago Board Options Exchange -- CBOE -- is the exchange for options trading, and the CBOE website provides a large amount of educational material for the novice and experienced options trader alike.
- Options contracts are time-limited with set expiration dates. It is important to understand what can happen at expiration with an options contract based on the option parameters and the value of the underlying stock. It is possible to quickly lose all of the money you invested to buy options.
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