How to Trade SPY Options

by Steve Gregory

Trading options in the S&P 500 (which is also known as "SPY"), is a lower-cost alternative to trading traditional stocks on the open market. Trading options requires you to risk only the fee associated with an option contract. The contract establishes the price at which you and another party are willing to sell or buy stock before a specific date. Therefore, trading SPY options can be profitable, depending on the difference in monetary value between the price you set to buy or sell stock and the actual price at which it is traded on the day the contract is exercised.

Open a margin account at an online brokerage firm, such as E*Trade, Charles Schwab or TD Ameritrade. You will need to submit your bank account information, your employer information and Social Security number and fund your margin account with the minimum balance required by the brokerage. The brokerage will also perform a credit check.

Find companies with which you want to make options contracts. Research all aspects of a company's past performance, management team and future plans to get an overall idea of its future stock performance on the market.

Use the information you gathered from researching the companies to determine how you should set the price to buy each company's stock. Set for each stock a price that you believe represents the best opportunity for a profit. For example, set a price for the stock at a low price if you believe the price will eventually decrease on the S&P 500 within the set time range to exercise the contract. When the price rises again you may sell the stock for a profit.

Enter into an options contract with a seller for the stock that you want to purchase at the pre-determined price to be exercised by a set date. Once the contract is set, the seller is responsible for selling you the stock by the exercise date at the pre-determined price.

Pay close attention to the S&P 500 on a daily basis to ensure you are making the best informed decisions when executing your current and future options contracts.

Warning

  • Unlike trading with regular stock, which involves paying a set commission for every trade, you must pay a specific fee with each option contract according to the terms of the contract when you are trading options.

About the Author

An avid technology enthusiast, Steve Gregory has been writing professionally since 2002. With more than 10 years of experience as a network administrator, Gregory holds an Information Management certificate from the University of Maryland and is pursuing MCSE certification. His work has appeared in numerous online publications, including Chron and GlobalPost.

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