Stock Options and Online Trading Accounts
As you begin to understand the principles of trading options you will likely become impatient and want to make your first trade. That’s all well and good, however, as we will continue to reiterate, you must walk before you run. With that in mind let’s talk about how to open an option account. As you will discover there are a few more steps to establishing an options account then there would be for traditional trading account. Trading options is among the more volatile trading platforms and brokerage firms for opening new accounts consider many factors.
The brokerage firm you choose will handle all your options trades. After you have opened a brokerage account you will then be directed to open an options account. Generally, you can fill out your application online or use traditional mail and have them sent to you. Frequently, we are asked how much money do I need to begin trading options. The answer to that question is that the minimum amount will vary from brokerage firm to brokerage firm. However, it is typical for brokerage firms to require an opening balance of $2500. So maybe more than some may be less, it really varies from company to company.
Commissions for making trades have been reduced dramatically with the advent of the Internet and online trading of options. For all that trade options online, this is good. Some investors, especially when they are just beginning with options, prefer to have a brokerage firm representative place their trades. Obviously, the commission will be harder if the firm representative is involved. You may consider confirming your trades with the representative after you make them and save yourself some money.
Novice investors often use firm representatives and brokers as a resource. One of the biggest hurdles for any new options trader to overcome is to develop confidence in one’s decisions. Using a representative as a sounding board and discussing various strategies makes some new traders feel comfortable.
Many of the larger brokerage firms include sophisticated software and tools that enhance the trading experience, as part of their brokerage account package. Many also include online tutorials and articles. Your representative should be available to you for several hours per day, at least 10 to 12. You would do well to choose a brokerage firm who offers as many of these benefits as possible.
It is quite probable that you are informed at some point that trading options required a margin account. Let’s be clear about this right now. That is not true. However, options traders do use margin accounts. Opening a margin account is very similar to applying for credit. In fact if you trade on margin, you are essentially borrowing money from the brokerage firm to do so. You can expect a lengthy margin account application and a full credit check should you decide you want to open a margin account. Trading options is extremely volatile and money can be lost very quickly. Your brokerage firm will want to make sure you understand the principles of option trading in the risk associated with trading on margin. Within that application your brokerage firm will also determine whether or not you have the means to cover any potential losses.
Now that you have chosen a brokerage firm and decided to open a margin account you will need to complete an options agreement. The primary purpose for an options agreement is still the brokerage firm can determine how much knowledge and experience you have. Again the brokerage firm wants to make sure you fully understand all the risk associated with trading options and that you have the financial resources to satisfy any losses. If you lack experience trading options it is likely that you are agreement will be restricted to buying calls and puts and selling covered calls. More advanced strategies will be approved later.
It is required that any brokerage firm you’d choose to distribute options disclosure document. Basically this document advises you of the risk of trading options. You may even change your mind after reading this document.
After completing this process you are now a step closer to actually making your first trade. We will continue to provide educational resources about trading options