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Getting Started With Options
Preparing To Trade
Getting Started With Options
Preparing To Trade
April 10, 2002
I assume you are reading these columns because you are interested in using options as an investment tool. Before we get into a discussion of various option strategies available to you, let’s spend a short time learning the steps you must take in order to open an options account with your broker.
You will be told many times that investing with options is not for everyone. And it is true. In order to be certain you have an understanding of the risks involved when using options, the Options Clearing Corporation and all the options exchanges make it a requirement that you receive 2 educational pamphlets before you are allowed to place your first trade:
- Characteristics and Risks of Standardized Options
- Understanding Options
These brief pamphlets are valuable for newcomers to the business of stock options and it is advantageous to read them. Your broker will send you a copy of each when you open your account, but if you prefer not to wait, you can obtain a copy from the OCC, any of the options exchanges, or by calling 1-800-OPTIONS. Copies are available online .
Your broker will require you to open a margin account in order to trade options. That type of account allows you to borrow money from your broker, but it does not require you to do so.
If you already own stock, it will be easier if you deposit the stock certificates with your broker. Although this is not necessary, as you will see in a future column, if you want to participate in one of the most conservative but profitable options strategies, it will be necessary for you to deposit those stock certificated with your broker.
When you have received, and hopefully read, your pamphlets and when your account is opened, you are ready to trade options. You can enter an order in the same way you enter a stock order. Thus, you either enter your trade information online or call your broker to place the order.
Your order is routed (sent) to one of the options exchanges (see last weeks column ) where an attempt is made to fill the order (if it is a market order, it will be filled; if it is an order at a limit price, it may or may not be filled). There are professional traders called market-makers or specialists at each of the exchanges. They constantly display prices they are willing to pay (called bid prices) from option sellers and prices they request option buyers to pay (called the ask price). They buy and sell options from each other and from customers like you. They take those options into their own accounts and either make or lose money on those options. They make efforts to minimize their risk, so they are constantly ready to buy/sell from customers.
When your order is filled, your broker notifies you.
Those are the basic mechanics of opening an account and trading options.
Next time we will discuss the three things you can do with an option if you decide to buy one.
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