Here are the following steps that need to be completed in order to start Option Trading:

 

You will have to mention that this account will be used for Option Trading.

Unlike opening a regular trading account, Option Trading will require specific documentation

to be signed, mainly due to larger risk of trading.

Once your account is open/approved you may start trading.

Essentially, options are just another way to invest in stocks. It's not quite as direct as just buying a

stock, but the beauty is that they give you more flexibility and choice over the cost and timing. More

on that shortly...

Simply put, a stock option is a contract that gives an investor the right (but not the obligation) to buy

or sell shares of an underlying stock at a set price on or before a set date.

You can buy and sell options contracts on regular stocks, indexes, ETFs (exchange-traded funds)

and futures contracts in the commodities world. For example, if you wanted to play options

on Google (Nasdaq: GOOGL), Google stock would be called the "underlying asset/security."

When talking about stocks, each options contract is comprised of 100 regular shares of the

underlying asset.

Okay, now let's go over some basic terminology that you'll need to know when executing trades...

Four Simple Terms Of The Options Trade

No matter whether you're buying or selling options, there are two main elements that make up every

trade:

* Strike Price: This is the set price at which your option is exercised - i.e. the target price of

the underlying asset.

* Expiration Date: This is the month and year that the option expires. If the right to buy or sell

isn't exercised by the expiration date, the option expires worthless. All options expire on the

third Friday of the corresponding month.

The strike price and expiration date are fixed from the beginning of each options trade and don't

change for the duration of it.

And just like you'd do when weighing up a stock trade, you have to decide whether you think the

underlying asset is going to rise or fall. When playing options, there are two basic forms:

* Call Options: You buy calls when you think the underlying asset is going to rise. These give

buyers the right to buy the stock at the stated price on or before the stated time.

* Put Options: You buy puts when you think the underlying asset is going to fall. These give

buyers the right to sell the stock at the stated price on or before the stated time.

You can find a complete list of a company's available call and put options at the various strike prices

and expiration dates on its options chain. Options prices are based on several factors, including

strike price, expiration date, plus the volatility of the market and the company and underlying asset in

question.

So if you're new to the options world (or even if you aren't, because the following strategy is

excellent for any investor), let's talk about the best, safest place to start...

Beginner: Selling Covered Call Options

Pocket A "Stealth Dividend" On Stocks You Own...

Did you know that if you hold regular shares in your trading account, you can earn passive income

on them?

I'm not talking about through a regular stock dividend. I'm talking about through the premium you

receive from selling call options against your long shares. In other words, someone will pay you

money for the rights to your shares for a set price (the "strike price") and at a set time (the

"expiration date"). This is yours to keep, no matter what happens with the trade - and is much better

than simply holding your shares and waiting for the price to rise, while earning nothing.

And in a volatile market, those premiums can get pretty fat, so it's even more worthwhile.

You do it by selling covered call options - a simple strategy than any investor can use. You just need

to have two things to get started...

1. 100 Shares: You must own 100 or more shares in a company (because there are 100

shares in an options contract).

2. Options Account & Approval: In order to trade covered call options (or any options, for that

matter), you'll need to open an options trading account. This is separate from a regular stock

trading account. You'll also need to get approval to trade options from your brokerage. Don't

be put off! Brokers are required to ask about your options experience and knowledge by law

- and it's typically a straightforward process that consists of a simple questionnaire.

And selling calls against shares you already own is a great place to start investing in options,

because it's an introductory, more conservative strategy, where your existing shares act as

insurance against the options.

Okay, so before we pick a covered call, we need to run through a few simple terms that make up an

option's value, as that will factor into the strike price we pick...

In, Out, Or At (The Money): Assessing An Option's Value...

Call and put options come in three basic forms:

* In-The-Money (ITM)

* Out-Of-The-Money (OTM)

* At-The-Money (ATM)

Simply put, for call options...

* In-The-Money: Refers to a strike price that is lower than the current price of the underlying

stock.

* Out-Of-The-Money: Refers to a strike price that is higher than the current price of the

underlying stock.

* At-The-Money: Refers to a strike price that is the same as the current price of the underlying

stock.

For put options, those descriptions are reversed:

* In-The-Money: Refers to a strike price that is higher than the current price of the underlying

stock.

* Out-Of-The-Money: Refers to a strike price that is lower than the current price of the

underlying stock.

* At-The-Money: Refers to a strike price that is the same as the current price of the underlying

stock.

Beginner: Buying Call Options

Use The Power Of Leverage To Control Shares For Less...

Let's say Dell is trading around $11 and you think it's headed higher. You want to buy 100 shares,

but that would cost $1,100 - and maybe you don't want to spend that much upfront and tie up your

capital. Maybe you can't afford to pay it all now.

Here's the options alternative...

* Rather than pass on the trade, you can buy one call option on Dell in anticipation of its value rising

in the future. This gives you the right to buy those 100 shares at your desired strike price at or before

options expiration for a much lower cost.

* For that right, you pay the option seller to "hold" the shares for you at that set price until expiration

(in other words, the premium).

You just have to decide how high you think Dell shares will rise - and over what period of time - so

you know which option to buy.

How To Buy: To execute an option buy, the official lingo is "buy to open."

So having looked at Dell's options chain, you decide to buy the $15 call, which expires in seven

months.

To ensure that you get the best possible execution price for this trade (and on any trade, for that

matter), make sure you use a limit order when you "buy to open." This is basically an instruction to

the brokerage to only buy the asset at or under a specific price.

The best way to do it is to set the limit order price about halfway between the bid price (the price at

which a buyer is willing to pay) and ask price (the price at which a seller is willing to sell) on the

options chain.

Remember that the current price of an asset only reflects the last trade, whereas the bid and ask

prices are a more accurate representation of the price you can buy and sell for. So rather than pay

the "market price," the better play is to use limit orders. Once the price hits your limit price, the trade

will be executed.

So for example, if the bid price for the $15 call option is $0.45 per contract and the ask price is

$0.55, you'd instruct your brokerage to: Buy to open the Dell November 2009 $15 call with a limit

order of $0.50."

* And in our Dell example, given that the contract comprises 100 shares, your outlay for the $15 call

would be $50 ($0.50 x 100 = $50). As you can see, that's significantly less than the $1,100 you'd

shell out for buying the 100 shares outright.

* So with $15 as your strike price, you now have the right to buy those 100 Dell shares for $15 a

piece any time before the expiration date on the third Friday of November. Ideally, you want the

shares to be higher than $15 by expiration, thus enabling you to either buy them for less than the

current market price, or make you a very good profit on your call option.

This is the beauty of buying call options - you greatly increase your leverage. To control the same

number of shares (100), you have just $50 at risk versus $1,100. You'll also emerge with a greater

profit, as option prices move more dramatically than the underlying asset.

The danger here is that if Dell's share price doesn't move higher, the option will expire worthless and

you'll lose the money you paid for it. That's why it's imperative you don't spend more than you can

afford to lose. One tip here to mitigate your risk is to buy longer-term options (which we'll cover in

just a moment).

But what if you think a stock is headed lower?

Beginner: Buying Put Options

A Better Way To Play The Downside

The conventional way of playing stocks that you think will decline is to short them on the stock

market. But this is risky, as you're borrowing shares from a seller and hoping the price falls. But if the

price rises, you lose money and are often forced to "cover" your position by buying back the shares

at a higher price.

There's a better way... buy put options.

For example, if you think Dell shares are set to decline, you could buy the November $7.50 put

option. And in the same way you'd want the share price to rise higher than your call option, you'd

want it to sink below your put option if you were playing the downside.

This is also a good strategy to use when you want to hedge against any potential downside on a

stock. For example, if the market is particularly volatile, or the company has an upcoming earnings

announcement and you want to protect your position, you could buy a put option. When you do this

at the same time as executing a stock buy, this is known as a "married put."

What Goes Up Must Come Down: The Best Way To Play Falling Stocks

When most people invest, they do so with the goal of seeing their stock holdings rise in value. After

all, it's human nature to want investments to rise, not fall.

It's why positive days for the stock market bring cheer, while negative days cause gloom and stress.

But if you're only investing to capture the upside, you're only running at 50% speed. No investment

goes up forever. And in a volatile, unforgiving market where assets can fall just as quickly as they

rise, investors who take a one-dimensional approach like this are leaving a lot of profits on the table

because they're only profiting on the way up.

It's time to get real and profit from the downside, as well as the upside. But what's the best, safest

way of doing so?

The Short Strategy Can Leave You With The Short End Of The Stick

When investors play the downside, it's commonly referred to as "going short" or "shorting" an asset.

You can short indexes, stocks, currencies... virtually anything you want. But doing so through a

regular stock-based trade can be a risky game because the rules are different.

When you short a stock, for example, you do so without actually owning it. Instead, you're

"borrowing" shares from someone who has a long position on the asset, so you're actually on the

hook to somebody else, rather than just yourself.

Once you've "gone short," you want the stock to fall, so you'll be able to replace the shares you

borrowed (i.e. buy them back) at a lower price. Your profit is the difference between the price you

borrowed the shares and the buyback price.

But if the stock rises, you're in trouble. That's because you're now obligated to buy the shares at a

higher price than you borrowed them. This is called a "short squeeze," and your losses are unlimited

for as long as the stock keeps rising and until you buy back the shares.

Worse still... if many other investors shorted the stock, too, you're fighting to buy back the shares

with them in an attempt to stop your losses. This is known as "short covering" and the sudden

demand can artificially inflate a stock.

Simply put, while shorting a stock can prove very lucrative if you're right, the consequences if you're

wrong can be disastrous. And for many investors, the risk-reward ratio just isn't good enough.

But the market offers some flexible alternatives. And there's a better, safer way to play the downside:

Buying put options...

Using Puts To Play A Stock Drop

Are you one of those shareholders who simply waits for your stocks to rise but are fearful of a

downside move because you're not protected?

You can guard against this risk by buying put options.

This is known as "hedging," where you employ strategies that help you weather the inevitable

downturns and essentially give you another way to profit.

To execute a put-buying strategy, you must already own at least 100 shares of a company. That's

because there are 100 shares in one options contract.

So for example, if the market or stock is particularly volatile, or if there's an upcoming earnings

announcement and you're worried that it will release negative news, rather than short the stock, you

could do this...

* You need to get a sense of how far the stock might reasonably fall--and over what time period--so

you know what strike price and expiration date to pick for your put options.

* Select the expiration date and strike price. Remember that for every 100 shares that you own, you

can buy one put option at that level. Doing this gives you the right to sell your shares at that price by

options expiration. If the stock doesn't drop to that strike price by expiration, although your stock

position may still be okay, your puts will expire worthless and you'll lose your investment.

* If the stock falls, your put will make money. But if the stock rises and the put loses value, your loss

is only limited to what you paid for the put option contract(s), rather than the unlimited losses that

can rack up if you shorted the stock and got it wrong.

If you buy put options at the same time you execute the stock purchase, the transaction is known as

a "married put."

Buying put options is a good strategy to use when you want to hedge against any potential downside

because rather than losing money as your stock declines, you at least cover your bases and offset

some of the loss.

In-The-Money Or Out-Of-The-Money?

When selecting which strike price to use for your put options, you have two choices: In-the-money or

out-of-the-money.

When you're talking about puts, in-the-money options are higher than the current share price. 

Money options have strike prices lower than the current share price - and are your best bet.

Here's how a trade would work...

Out-Of-The-Money Put Options:

* For example, let's say you bought a stock for $15 and it's now $20.

* If you think it's set to decline, you could protect your existing gains by buying the $17.50 out-of-the money

put contract for $0.40. When you do, you have the chance to sell your shares at that $17.50

anytime up to options expiration.

* To work out the profit on the trade, you simply subtract the option premium price ($0.40) from the

strike price ($17.50) for a total of $17.10.

* Then, if the stock trades below $17.50, you have the right to exercise your options for a profit. That

profit would be the sell price ($17.10) minus your original entry price on the stock ($15) - $2.10.

As you can see, buying put options is a much simpler and safer way to play the downside on your

stocks. Unlike the short-sell strategy, where your losses are unlimited as the stock rises until you buy

the shares back, puts give you more peace of mind, as your losses are limited to what you pay for

the options. Next time you want to play a stock's decline, do it with put options.

Conclusion

And that just about wraps up this quick-fire guide to the options world.

As you can see, there's little reason to be put off or scared by options. It's simply a case of getting a

grip on the basics and, like any form of investing, knowing what you're doing so you don't get

burned.

In truth, options should be an essential part of any investor's toolkit, as they help diversify your

portfolio, lower your cost, lower your risk, and provide some extremely attractive upsides.

Naturally, there are risks, too (as with any investing), but when you have a good grasp of the

fundamentals, you can greatly mitigate those risks. Thank you for your time. Ray