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How to invest with options

With all the talk about derivatives on Wall Street and Washington, the average investor might think that derivatives are confusing and complex and not available to them. The fact is that derivatives have been around for awhile and actually come in a variety of types. For example options, where you pay money up front for the option to buy or sell a stock, have been around for decades. Learning to invest with options adds a layer of protection for any investor with a significant portfolio, helps to diversify your risk, or even opens up a world of speculative investment for investors who don’t mind taking chances. Learning to use options is critical to the success of any portfolio today. We don’t think that that’s exaggeration. Hedge funds, pension funds, large institutional investors of all types are using options as a way to guarantee that whichever way the stock market goes they will have some protection. Given the way the stock market has been volatile in the past, it’s important to learn how to use these tools as just that-another tool in your toolbox.

Understanding options is not that difficult.

There are a huge variety of online tools available to help teach investors how to take advantage of this valuable investment vehicle. For example the options institute has an entire website devoted to nothing but educating investors on how to use options. The Options Industry Council(OIC) provides many top online educational tools including free webinars, recorded seminars, and virtual training platforms to help any investor try their hand at buying and *selling options* while taking zero risk with real money. In addition, you can find multiple books and magazines available for additional education. There are all kinds of books on the market on the subject getting started with options. Reading these, in conjunction with the virtual training tools available online, can help you get your feet wet and feel more confident in your ability to train options.

How do options work?

The simple answer is that an option is simply giving you a right to buy or sell a stock but not the obligation to do so at a specific price that you select. Options are available for individual stocks and ETF’s on the market. There are also options available for commodities and futures trading. When you research options online, you select an individual stock for example for which you would like to see the option chain. An option chain lists all of the outstanding options for the next several expiration periods. When you purchase an option, you are purchasing the right to buy stock at a particular price point before an expiration date. So if you select a stock that you expect to go up in the next several months, you would buy a call option.

When you are buying or selling options based on stock you have in your portfolio that is called a “covered” option. When you don’t hold the stock itself in your portfolio, these are called “naked” options. Selling options based on stock you have in your portfolio lets you take care of market downturns where you may lose money on your stock price but earn money on your option purchase. Unlike covered options, buying or selling naked options is an outright gamble on whether the price of the underlying stock will go up or down.

Some of the best brokerages where you can trade options are the discount brokerages. Brokerage companies like Trade King, Options Express, or Interactive Brokers are brokerage houses that allow you to trade options for very low cost. With options, you normally pay a commission plus a price per contract. If you are buying and selling options frequently, these costs can add up so it makes sense to use a brokerage with low fees. In addition, many brokerages offer extensive training tools as well, because as an investor gets more educated about how to invest in options, they are more likely to purchase these investments for their portfolio. Look for features like how to materials including publications and webinars, forums where investors both beginner and expert alike that exchange information, and other trading blogs that can show you hands on information about actual trades being made in the field. Some brokerages even allow investors to publish their trades, so that you can follow along with some of the top traders who are training with the same firm.

*Getting started with options* is fairly simple. It might take some time to learn the ins and outs and go through some of the training materials, but afterward you will have a knowledge base that will help you profit and build your portfolio exponentially.

Most brokerage accounts allow options trading for certain investors, and certain minimum balances may apply. Check with your broker, or investigate some of the other top brokerages for trading options. Here at Saving Cash Tips, we recommend Trade King, which is the brokerage we use ourselves. They offer an extensive variety of educational tools, forums and discussion groups, and research tools that are hard to find at other brokers. In addition the fees are rock bottom. Whether you decide to use options as a hedge mechanism or as a speculative vehicle to boost your returns, if you expect top returns you will definitely need to learn how to invest with options.