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What you need to know about trading sessions
Financial exchanges are a 24/5 market. When it is evening in one part of the world and people stop trading, in another part of the world it is just the beginning of the day. Trading sessions follow each other over and over. Depending on the time of the day, volatility for different assets vary.
An experienced trader who knows which assets are more volatile at specific times of the day has a competitive advantage and can trade much more effectively. Comp a red to other assets, it is possible to trade currencies 24 hours per day, 5 days a week, with weekend breaks, now we offer Bitcoin as a weekend.
There are four trading sessions:
From the table above we can see that some trading sessions overlap. During such periods there is higher activity and volatility in the market. Many traders like such overlapping periods the most, because they are easier to analyze. Furthermore, at the very start and at the very end of the trading sessions there might be a great deal of movement due to the fact that at the beginning of the sessions there are a lot of traders who want to open a new position and by the end of it a lot of positions are closed in order to avoid risk.
Key features of the trading sessions:
Pacific trading session:
The foreign exchange market starts with the Pacific trading session at 21:00 GMT. The key feature of the Pacific TS is that it is the least volatile, and massive price movement should not be expected.
Experienced traders try to refrain from trading during this period of time, but they keep analyzing the market, checking whether the historical and psychological levels are broken or not. These traders usually avoid trading in high volumes during the Pacific TS as trading movements are harder to analyze.
During the Pacific trading session, such assets as AUD/USD and NZD/USD are the most popular as both AUD and NZD are the national currencies of Pacific countries.
At 23:00 GMT the Asian session starts. The Tokyo stock exchange is the first to open and an hour later the Singapore and Hong Kong markets open as well. Activity on the markets increases.
The most volatile currency pairs are those with JPY – USD/JPY, EUR/JPY, GBP/JPY. Also, EUR/USD and AUD/USD should be taken into consideration, usually the Asian session is the one that sets the day’s trends.
The most volatile period of the Asian TS is closer to the end of it, yet in general the market is pretty quiet during the Asian TS.
There are many financial markets in Europe, but the most important of them are Frankfurt, Paris, Moscow and London with some 30% of the total volume of the financial markets.
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The important feature of the European TS is that it overlaps with the Asian trading sessions in the morning and overlaps with the American trading session in the evening. Despite the fact that the volatility increases there is no aggression in the market.
During the whole trading session there is quite high volatility and the amount of assets available for trading is high. Currency pairs with EUR, GBP and CHF are the most popular during the European TS. For example, EUR/USD, GBP/USD, CHF/USD, EUR/JPY, GBP/JPY.
Another important trading session, the American TS, starts at 12:00 GMT or 13:00 GMT, depending on daylight savings time. It is important to keep in mind that the American trading session is not only the United States, but also Canada and Brazil.
The American trading session is very volatile and aggressive because market participants pay too much attention to the published news. During the American trading session the actual trend can change easily. Key economic news is announced between 12:00 and 14:00 GMT, and news has a massive impact on currency conversion rates.
There is a high trading activity during the American trading session. The majority of traders pay attention to those assets that involve either USD or CAD and volatility on assets with JPY increases as well. Those who enjoy trading on rapid rate movements often trade on such cross-assets as GBP/JPY and GBP/CHF.
The key to success in trading in financial markets consists of several important factors. One of the key components to successful trading is the ability to act and trade correctly during different trading sessions. The specifics of trading during different trading sessions will allow the trader to use his time and resources effectively and efficiently.
NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.
In accordance with European Securities and Markets Authority’s (ESMA) requirements, binary and digital options trading is only available to clients categorized as professional clients.
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Why young people should pursue a career in international trade!
Domestic career prospects—for young Canadians in particular—currently leave a lot to be desired.
Everyone knows a young person with an education who is currently struggling to break into the professional world. The reality is, this situation can be changed for these individuals if they take the right steps to build a global career.
With many opportunities and a diverse set of global trade occupations, such careers are both feasible and desirable options for people with a wide variety of passions, skills and career goals.
Increasing the number of young people working in these careers can also help to solve one of Canada’s other biggest challenges:
Our country is rapidly falling behind in the race for international trade.
Canada’s exports are now $40 billion lower than what they should be, according to the Governor of the Bank of Canada. There are also now 9,000 fewer companies engaging in export than at the start of the recession.
In comparison, nearly 25,000 more U.S. SMEs exported in 2020 than in 2007-2008, at the beginning of the recession.
For those of us in international trade, we see Canada falling behind on a daily basis. In China, Australia is, “Eating our lunch,” to quote former Deputy Prime Minister John Manley, who I had the opportunity to hear speak as he moderated a Canada 2020 discussion on this very topic.
While Canada is making progress in its trade relationship with China and signing agreements, Australia signed an FTA with China in 2020, giving them an advantage over Canada.
A smaller number of exporting Canadian businesses also places a greater reliance on those who are still involved in international trade.
While there are just over 1.16 million SMEs in Canada, just 41,000 of them currently export, or about 3.5 percent. In comparison, just over 302,000 of the 5.66 million American SMEs currently export, or 5.3 percent.
The need for the number of Canadian companies involved in trade is then further seen when one notes that Canada’s trade is equivalent to 60 percent of its national GDP, compared to 29.8 percent of the U.S. GDP.
Canada is therefore relying on a segment of businesses just two-thirds the size of their American equivalent to produce double the percentage of the nation’s GDP, an unsettling statistic for Canada’s long-term economic future.
Canada’s youth unemployment—which is currently at around 13 percent—and Canada’s international trade performance are major issues facing the Canadian economy.
In order to solve the question of job security for Canadian youth on a long-term basis, we need to present Canada’s current international trade issues as opportunities for fruitful employment and advancement. By solving the former issue, Canada can make significant strides to solving the latter and surpassing many of its international competitors.
As we work towards a long-term solution, we need to do a much better job as a country; business, government, industry, education and youth must all be involved.
One of the biggest struggles facing these businesses point out is that they struggle to find individuals with the knowledge, skills and experience to fill their current HR gaps and help them to continue growing globally.
The solution requires training, programs and initiatives targeted squarely at the youngest members of society to give them the skills necessary to truly enable Canada to fly on the world stage.
Why should you pursue a career in international trade?
The reason why anyone should pursue something is because they have a passion for it. For you young people wondering what you should choose to do with your career, international trade is an opportunity.
The opportunity presented in joining the international trade field is a huge one, and the need is there, not just in Canada but also in virtually every country in the world.
When global business is put into perspective and held up against other career choices, it is an exciting option.
As a career, it offers you the opportunity to be a constant learner, to work in a changing environment, and to face challenges that enable you to make a real impact on the company or organization for which you work.
- Travel: The opportunity to explore new cultures and markets, looking for new products and services, or buyers to purchase them. I have had the great opportunity to travel extensively through China, Malaysia, Singapore, Costa Rica, Panama, Colombia, Ecuador and Indonesia. I even had the opportunity to participate in the APEC CEO Summit in Honolulu. The trick is to make sure you always take a few hours and go explore the area instead of staying in the hotel!
- Change: With the fast moving global economy, it is your opportunity to play a role in it. Very few days at work will ever be the same. In 2020 I was a leader on a project to bring 25 Chinese youth to Canada to learn how we do business. This was an example of global business development at Global Vision.
- Passion: Every sector of the economy needs to trade. From hockey gear, to financial services, and insurance. There are opportunities for you to work with products and services you are passionate about. In my time travelling and learning about other cultures I have had to learn quickly about value-added agriculture products, and I developed a passion for them. Perhaps this is because I enjoy eating—but also because Canadian agriculture products are absolutely superior in the global context. They represent quality, and an opportunity for our country to dominate in a market.
If all of that sounds exciting, then perhaps it is time to consider a career in international business.
A few programs, which I am familiar with, are listed below to help you get on your way.
Solutions in education
Ultimately, the solution lies in educating yourself to be able to take up the baton. Here are a few organizations, programs and opportunities which exist (there are more) for young people to get started on the road towards a career in international trade.
All of these programs and their offerings actually complement one another, and represent unique opportunities, thus the best solution could be a combination of the below.
- Global Vision – Junior Team Canada: Prior to launching Atlantic Trade Linx, I had the opportunity to work for Global Vision as a Project Manager on the organization’s Junior Team Canada Program. And prior to that, I was involved with the organization as a student ‘Ambassador’. The program was founded in 1991 by Terry Clifford, a former Member of Parliament from London, Ontario, to help young Canadians 16-25 gain hands-on trade-mission experience by doing work for Canadian SMEs.
- Training and professional certification: There are a number of professional training and certification programs you can go through in order to gain knowledge, skills and accreditation for a career in international trade. The FITT program offers the CITP®|FIBP® designation, and its training courses are delivered in partnership with institutions from coast to coast in Canada and around the world, as well as online. This enables you to easily work and train at your convenience.
- Foreign service: If you want to help sell the business or brand of an entire country, then perhaps this is the place for you. It could also be suitable if you want to work internationally in the field of politics and trade, helping to craft and negotiate trade deals and navigate relations with other countries. You can learn more about the specifics here.
- International business (with a study abroad option): Many universities and colleges offer international business programs. How does one pick the right program. The answer is to look at the program components, looking for opportunities to spend time working on your degree in another country or market which you are passionate about. This will give you hands on cultural and linguistic experience, making you highly desirable to companies and businesses doing business abroad.
Ultimately, the key to success is choosing to pursue the dream.
There is a large opportunity in the market for individuals who have the skills necessary to help companies, especially helping SMEs enter new foreign markets and sell their products to the world.
The question is, are you ready to take up the challenge?
What other questions do you have about pursuing a career in international trade?
Options Trading: What It Is, How It Works & BEST Strategies
It’s important to know about all sorts of trading strategies. So let’s take a little time to talk about some options trading examples and how it all works.
Even though I don’t do options trading, that doesn’t mean you can’t or shouldn’t.
Why am I taking the time to do this? Because I understand that trading isn’t one size fits all.
I made my fortune trading penny stocks, and that’s what I teach my students. But I also think it’s important to learn all about the different trading strategies out there so you can decide for yourself what you want to pursue.
Becoming a self-sufficient trader is all about finding out what works for you and refining your methods over time.
For some traders, options have proven a successful strategy. Could it be a good fit for you? Read on to learn more — I’ll cover some fundamental basics, key terms, and strategies for options beginners.
Table of Contents
What Is Options Trading?
Options are a specific type of security called a derivative.
There are lots of examples of derivative investments. They’re a type of financial security that’s valued based on either a single or a group of underlying assets.
Some examples of these underlying assets include bonds, commodities, currencies, stocks, and market indexes.
Derivatives can be traded like stocks, either OTC (over the counter) or via an exchange. Their price can and will fluctuate based on the value of the underlying stock. That’s where the inherent risk comes in.
Option prices are derivatives of the stocks they represent.
Options Trading Rights and Obligations
With options, you get the right — but not the obligation — to purchase or sell a certain amount of stock (or other securities) at a pre-arranged price and on a specific date. That price is derived from the stock’s price.
Options are contracts, but they give you the rights to buy or sell — not an obligation. They’re different from regular stock plays and futures because you can decide not to go through with the contract.
Options Trading Examples: How Can You Succeed?
Before I answer that question, I gotta say this: I’m not an options trader and I’m in no way giving you trading or financial advice. All trading is risky. Never risk more than you can afford. Do your due diligence.
To succeed as an options trader, your education is vital. You need to know how it works and how trades play out.
Keep reading to learn options trading basics along with some examples to help you start to put it all together.
How Does Options Trading Work?
Think of how options trading works in terms of selling a car to a private buyer.
- You meet the buyer who looks over the car and gives you a deposit to hold the vehicle.
- You get to keep the deposit even if the buyer decides not to return with the full purchase price by the agreed-upon date.
- The prospective buyer has bought the option to buy the car by whatever deadline you set.
- If the buyer doesn’t, you can sell the car to someone else — maybe even for a higher price — and you already have the deposit in your pocket.
Options trading is far more complicated than that, but it can be easier to understand when you have an example outside of stock market options.
I really want to stress that you need to learn the basics of options trading before you execute any contracts.
Otherwise, you’ll lose money like thousands of other traders who jump into options trading without the right knowledge.
Options Trading Brokers
Just like with stocks, you need a broker to trade options. However, not all brokers offer options trading.
If you’re happy with your current broker, check with them first to see if they offer options trading. And if they do, find out what their requirements are.
If your broker doesn’t offer options trading, you’ll need to find one that does. Remember: don’t take this decision lightly. Be sure to do plenty of research on options brokers before settling on one.
While this post focuses on choosing a stockbroker, many of the tips are relevant for choosing an options trading broker too.
Types of Options
With options, you have … well, options. Let’s talk about some of the different types.
Long vs. Short Options
With stocks, you can go long or take a short position. With options, you can trade either call or put options. Here’s a brief synopsis of what they are and how they work…
A call option is a potential future trade.
For example, say you want to purchase 1,000 shares of Stock X at $4.20 per share at some point in the future because you believe it’ll go up in price.
You can purchase a call option to make this purchase at any point within a finite period. You’re kind of calling dibs or locking in that price.
However, the person selling doesn’t necessarily just want you calling dibs without getting something in return.
As the buyer, you’ve got to put down a premium — that’s the price of the options contract.
The benefit is that if the stock goes up in value, you can still complete the purchase at the agreed-upon price during the contract period. The premium you pay acts as a down payment.
However, if the option’s expiration date passes and you don’t move forward, you don’t get the premium back.
A put option is a contract where you as a contract holder have the right to sell the asset in question at any time within a predetermined, finite period.
Say you want to sell shares of a stock. You set your strike price — say it’s $5. With a put option, you can sell your shares for that price at any point before the expiration date.
The benefit of this method is that even if the stock value goes down dramatically, you can still get the agreed-upon price.
A put seller receives a premium or down payment in this case. A single put option represents a specific amount of the underlying asset in question. Frequently, it’s one put option to 100 shares of the underlying asset.
In other words, the “down payment” is 1/100th of the total purchase price.
Trading Call vs. Put Options
- A call option is best when you believe the price of a stock will rise.
- A put option is best when you believe the price of a stock will fall.
Benefits and Advantages of Trading Options
Some of my students have had excellent results with options trading. They’ve studied the market, recognized the potential pitfalls, and traded options with their own risk tolerance in mind.
Why do some successful traders love options trading? Here are some advantages.
Options can give you a ton of flexibility.
Yes, you have to plunk down that premium, but it affords you the flexibility to make the decision of whether to actually exercise the option later.
You don’t have to exercise the option if you choose not to. There’s no punishment. When the expiration date comes, the option becomes null and void.
Yes, this means that you lose the investment that you made for the option premium, but you won’t suffer any additional losses.
Also, since options are a type of derivative, you can use them to trade all sorts of financial securities like commodities and foreign currencies to name a few … It’s not just for stocks.
Limited Risk for Buyers
I’m all about cutting losses and limiting risk. Options can let you limit risk, which is a good thing.
Yes, you do have to put down that premium, and if you don’t exercise the option within a set period of time, you may forfeit that payment. So, in that way, there’s considerable risk depending on the number of shares you intend to buy or sell.
However, that risk can be minimal compared to the potential losses you might suffer if you made the trade without an options contract.
Yep … If you think options sound a bit like prospecting, you’re right. There’s a certain level of speculation involved in options trading.
For instance, if you purchase a call option, you probably have a strong belief that its value will go up in time and that you’ll be able to buy in at a low price. Employing a call option versus simply buying the asset or stock allows you additional time.
But remember the car sale scenario. The buyer puts down a deposit against the agreed-upon price. That’s all well and good. But the seller holds the cards here. If the buyer doesn’t come back, the seller keeps the cash.
It works the same with options trading.
While options buyers often speculate to a certain degree, one of the biggest appeals of options is that you can hedge your bets, so to speak. Hedging is a method of reducing risk.
I hate risk. Have I said that already? Let me say it again: I hate risk. And you should, too.
Like in the car sale analogy, an options premium creates a stopgap. It basically says, “This is the most I’ll lose on this deal if it goes south.”
Basically, you’re guaranteeing that this would be the maximum amount that you’d lose if things don’t go your way. It’s almost like an insurance policy. Yes, you have to pay for insurance, but if something goes wrong, you’re covered.
Some will say that if you’re not sure of a stock investment, you haven’t done enough research and it’s too risky to even pursue.
But some traders think that hedging can be an intelligent approach … you never know what factors will play into a stock’s or asset’s value. Hedging strategies can be extremely valuable, especially when the stakes get high.
Options give you the ability to restrict the potential losses on a given investment, while optimistically trying to make the most of the potential gains. It can be really cost effective when you think of it in that way. You’re paying for peace of mind.
How to Read an Options Table
The first time you try to read an options table, you’ll likely feel overwhelmed. I know I did.
With its staggering series of columns, it can be confusing.
However, once you break it down, it’s really not as complex as it seems. Here’s a cheat sheet of some of the common columns you’ll see in a table and what they mean.
This is short for Option Symbol. This column offers the basics: The stock symbol, the contract date of maturity, and the strike price. It also defines whether it is a call or a put option (specified with a C or a P).
Referred to in points, the bid price is the most up-to-date price offered to buy the option in question. So, if you were to enter a market order to sell the call or put, this would be the price commanded.
Also referred to in points, the ask price is the most up-to-date price offered to sell the option in question. So, if you were to enter a market order to buy the call or put, this would be the price commanded.
This shows the premium of time built into the option price. Since all options lose their time premium when the option expires, this value showcases the amount of time premium currently playing into the option’s price.
Implied Volatility Bid/Ask
Also referred to as the IV Bid/Ask, this column shows the potential level of future volatility. This is based on factors including the option’s current price and the amount of time until the option expires. This value can be determined by a model such as the Black-Scholes Model.
According to “The Economic Times,” the “Black-Scholes is a pricing model used to determine the fair price or theoretical value for a call or a put option based on six variables such as volatility, type of option, underlying stock price, time, strike price, and risk-free rate.”
Ultimately, with a higher IV Bid/Ask, there’s more time premium included in the option’s price.
Historical vs. Implied Volatility
Not sure about the difference between historical and implied volatility? Let’s take a little time out to talk about it.
- Historical volatility is based on historical data –– like actual past price action.
- Implied volatility looks at the past but is forward-thinking. It uses the past to predict what might happen with volatility in the future.
This column tells you how many contracts of a given option were traded during the last market session. Often, options with larger movement and volume will have a tight bid/ask spread, since the competition to buy and sell these options is higher.
This column tells you how many contracts of a given option have been opened, but have not yet been cashed in or sold.
This column tells you the strike price of the option in question. This is the price that the buyer has set to buy or sell the underlying security if he or she chooses to take the option.
Assessing Risks in Options Trading
In addition to the above columns in an options table, you’ll often see a series of columns with headings named after greek letters. One of the unique things about options is that they carry various values that can help you determine the level of risk.
I’m talking, of course, about the infamous “Greeks.”
If you’ve been researching options or looking at options tables, you’ve probably heard about the Greeks — and are likely confused by them. The Greeks include delta, gamma, theta, vega, and rho.
These measure a variety of factors that can affect price regarding a given options contract and are calculated using a theoretical model.
Sound complicated? Stick with me.
In this section, we’ll discuss what the Greek letters mean in options trading and how they can better help you understand an option’s risk and reward potential.
Delta is a Greek value that represents the “stock equivalent position” for an option. The delta for a call option can range from 0 to 100 (and for a put option, from 0 to -100 … yes, that’s negative 100).
In essence, the of-the-moment risk and reward with holding a call option with a delta of 100 is similar to holding the equivalent amount of stock shares.
Gamma is a Greek value that tells you how many deltas the option will gain or lose if the underlying stock rises by one full point.
Theta is the Greek value that indicates how much value an option will lose with the passage of one day’s time based on what’s referred to as “time decay.” This factors in the expiration date of the option.
Vega is a Greek value that indicates the amount by which the price of the option would be affected, either positively or negatively, based on a one-point increase in implied volatility.
Rho is a Greek value which acts to measure an option’s sensitivity to a potential change in interest rate. So, for every rho, the percentage point in interest rates will increase the option value.
How to Make Money Trading Options
When it comes down to making money trading options, you rely on the same logic as trading stocks.
You want to commit to buying or selling prices that will put you in an advantageous position to collect profits. But “call” and “put” don’t tell the entire story…
Successful Options Trading Strategies Explained
There are a ton of different strategies for options trading. Here are some common ones.
Long Call – Options Trading
This is the most basic type of strategy for the call option. Basically, it begins with your belief that the underlying asset will rise in value over time.
You buy a call option with a strike price that you believe the asset will exceed in value over time.
The hard part? You’ve got to determine an expiration date. This is something of a gamble because you hope the value will rise before that date.
You risk losing potential profits by setting an expiration date too soon after the contract begins.
Compared to simply buying shares in full, you gain leverage here because there’s a chance that the value will go up quite dramatically, and then you can buy in for that sweet predetermined price.
However, if the value doesn’t go up by the time that the expiration date is up and you decide not to go through with the order, you won’t get that down payment back.
Long Put – Options Trading
This is the most basic type of strategy for the put option. It begins with you either believing or hedging on the fact that the underlying asset will lose value over time. You buy a put option with a strike price that you believe the asset will sink below over time.
Like with a long call, you have to agree to an expiration date. Once again, this is a gamble because you have to try to determine by what date the asset will go down in value.
Some traders believe that, in comparison to short selling a stock, a long put is easier. For one thing, you don’t have to find shares to borrow, which can prove tricky, especially if you’re into pennystocking.
However, unlike simply selling short, your losses are finite. Selling short carries unlimited profit — but also unlimited losses. So comparatively, the losses can be controlled here.
What I want to point out, though, is that options trading is a zero-sum game. In other words, it’s you against the buyer or seller.
Trading regular stocks opens up the field, kind of like in a horse race. Everyone is betting against one another, which means you have stronger data and a greater opportunity to profit.
This is where things get a little bit more complicated. A call backspread, also referred to as a “reverse call ratio spread,” is a more bullish strategy.
Here, you sell a certain number of call options, then buy more call options of the same underlying asset with a higher strike price.
This is a little bit more aggressive of an approach for purchasing options. It’s most appropriate when you really think that the asset will experience huge growth in the near future.
The call backspread profits when the price goes up sharply and the profits are virtually limitless for the buyer.
The put backspread is the yin to the call backspread yang. It’s also referred to as the “reverse put ratio spread.”
Basically, you sell a certain number of put options, then buy more put options of the same underlying asset, but with a lower strike price.
There are virtually limitless profits available with this strategy, but it also demands greater risk tolerance. The put backspread profits when the price goes down sharply, and the profits are virtually limitless for the buyer.
For buyers who are worried about their assets, the protective put, also referred to as a “put hedge,” is a method of hedging.
When you’re worried about a market downturn or crash, or a change in the value of an asset, you may invest in a protective put to protect from limitless losses.
Here, it’s like you have a previous purchase that you’re protecting with a proverbial insurance policy. This is what differentiates it from a long put — the fact that you’re already in the trade.
In this way, it’s almost like refinancing a house you already own versus buying a new one. But when it comes down to it, the risk is still similar to a long put.
Bear Split-Strike Combo
This is one of the most complicated strategies … and definitely the one that sounds most like a circus sideshow. Here’s how it works.
You have one long put with a lower strike price and one short call with a higher strike price. Yup, you have options in both directions with the same underlying asset and expiration date, but with different prices.
You could call this the ultimate in hedging because you’re putting a wager on whether the asset will go up or down. So if it goes up, you can profit from the call. And if it goes down, you can profit from the put.
Common Options Trading Mistakes
Choosing the wrong strategy. Like with trading, not all strategies are a perfect fit for all traders. It may take trial and error, but it’s important to stick with a strategy that matches your style.
Wrong expiration date. Picking the right expiration date for options contracts is hard … so ask yourself these things first:
- What’s the market liquidity like?
- How long do I think it will take for the price to move higher/lower?
- Do I want to hold this contract through seasonal fluctuations like earnings season?
Going all in. It can be tempting to take a huge position since you only have to pay the premium … but resist the urge. Remember: you can still lose money. Never trade more than you can afford to lose!
Why Do You Need Expert Assistance?
You could learn things the hard way, or you could speed up your learning curve by seeking out assistance.
I won’t be your mentor for options trading. But if this is a strategy you’re interested in, do yourself a favor: find a program or mentor where you can learn all you can before risking your cash!
Like I said before, trading options isn’t my thing. But what I can teach you is how to trade penny stocks. That’s what I focus on with my Trading Challenge.
My goal as a teacher is to help my students forge long-term, sustainable careers as traders.
I focus on all sorts of strategies for trading low-priced stocks. I want you to be adaptable, diverse, and most of all intelligent in your trading.
Articles, daily alerts, webinars, and an extensive video collection are just a few of the many perks you’ll get as a student.
I’m here to help you become a smarter trader who knows how to cut losses and refine successful techniques to keep getting better. You game?
The Final Word on Options Trading
Options trading is appealing to many traders … and with good reason.
It can come with a lot of benefits, including flexibility, limited risk, and the ability to gain profits based on foresight gained through study and research.
However, options trading isn’t without its fair share of risk. It’s so important to become educated on any style of trading you want to pursue. Never just throw your money at the market!
What do you think? Do you trade options? What strategies do you like best?
How much has this post helped you?
Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More
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As many of you already know I grew up in a middle class family and didn’t have many luxuries. But through trading I was able to change my circumstances –not just for me — but for my parents as well. I now want to help you and thousands of other people from all around the world achieve similar results!
Which is why I’ve launched my Trading Challenge. I’m extremely determined to create a millionaire trader out of one my students and hopefully it will be you.
So when you get a chance make sure you check it out.
PS: Don’t forget to check out my free Penny Stock Guide, it will teach you everything you need to know about trading.
Complicated stuff. Wearin a head sized Band Aid right now. Try and guess where.
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Stock Options Trading Basics
In this lesson, you will be introduced to options trading basics. You will learn about the different types of options and how they work. This is a very important lesson as you will need to know what kind of options exist and other basics for the upcoming lessons. Therefore, please take your time and go through these options trading basics carefully. Rather go through certain parts multiple times than continue without understanding everything.
If you prefer video over written articles, I suggest watching the video above. In it, I cover the same lessons as I do in this written article. For the best learning effect, you should watch the video lesson and read the following article.
Calls and Puts:
There are two main types of options: Call Options and Put Options. Call options give their owner the right to buy the underlying asset for a certain predetermined price. The owner of a call option usually hopes the price of the underlying asset will increase in price as he then can buy this asset at a discounted price. But note that the call option’s owner has the right and not the obligation to buy the underlying asset. If he is not interested in owning shares of the underlying asset, he does not have to buy the underlying asset.
Put options give their owner the right to sell the underlying asset for a certain predetermined price. This means the owner hopes for a decline in the underlying’s price. If the underlying’s price decreases in value, the put option owner would be able to sell the underlying asset for more than it is sold for on the open market. But again, the put option owner only has the right to do this, meaning he is not required to do so.
Buying options is also known as ‘going long’.
Besides buying to open option positions, you can also sell to open an option position. This is also referred to as ‘shorting’ or ‘going short’. There is a significant difference between buying to open and selling to open. Option sellers (also known as ‘option writers’) don’t have the right, but the obligation to buy/sell shares of the underlying asset if the option buyer chooses to exercise his right to receive/sell shares for the predetermined price. As this is the case, option sellers don’t have the same directional assumption as option buyers.
A seller of a call option wants the underlying price to go down and a seller of a put option wants the price to go up.
I will try to simplify this concept with two brief examples now:
- Christian buys a call option on the stock XYZ. Thomas sells this exact option to Christian. As Christian bought the call option, he has the right to buy a certain amount of shares of XYZ at a predetermined price. If Christian chooses to exercise this right, Thomas won’t have a choice. He will have to sell shares of XYZ to Christian. Christian wants the price of XYZ to go up so that he can buy the shares at a lower price. Thomas however, wants XYZ’s price to go down or at least stay the same so that it won’t be worth it for Christian to exercise his right.
- Emily chooses to sell a put option on ABC and Oliver buys this put option. Now Oliver has the right to sell a preset amount of ABC’s shares at a certain price. Emily does have the obligation to buy these shares of ABC at the certain price if Oliver chooses to use his right to sell ABC’s shares. Oliver would only exercise his right if the stock price would decrease as he otherwise would sell the shares for less than they are worth in the open market. Emily on the other hand, hopes for an increase in ABC’s price.
As you probably have noticed by now, I mentioned a certain predetermined price multiple times. When buying or selling options, you will have to choose a price to sell/buy the underlying asset for. Once again, I will explain this with a quick example:
- Let’s say you buy a call option on stock XYZ. When buying that call option, XYZ is trading at $100. You choose the strike price 105. A strike price of 105 means that you, as a call option owner have the right to buy 100* shares of XYZ at $105. Obviously, this is not worth it if XYZ’s price stays at $100 as $105 is a higher price than $100. But if XYZ’s price rises to $120, it would definitely be worth as you could buy 100* shares of XYZ for $105 (per share) instead of $120 (per share).
(*1 standard option contract controls 100 shares of the underlying asset.)
When buying options, you will always have to choose a strike price. Most big and well-known assets will have plenty of strike prices to choose from. Depending on what strike price an option has, the option will be called differently.
If the strike price of a call option is lower than the price of the underlying asset, the option will be considered In The Money (ITM).
If the strike price of a call option is greater than the price of the underlying asset, the option will be considered Out of The Money (OTM).
If the strike price of a put option is lower than the price of the underlying asset, the option will be considered Out of The Money (OTM).
If the strike price of a put option is greater than the price of the underlying asset, the option will be considered In The Money (ITM).
If the strike price of an option is close to the underlying asset’s price, it is considered At The Money (ATM).
Of course, the prices of these options are adjusted according to their strike prices to avoid arbitrage opportunities. But more about that later.
One significant difference between most other asset classes like stocks and options is the fact that options have an expiration date. You can’t just buy an option and hold on to it forever like you could with stocks. When opening an option position, you will have to choose a strike price and an expiration date. There are plenty of different expiration dates to choose from. You can trade options for the very short-term, the long-term and everything in between. For example, you could buy/sell options that expire in one or two days. Alternatively, you could open option positions in options that expire in a few years.
Different expiration cycles exist: quarterly, monthly, weekly… Usually, the monthly expiration cycles are the most popular ones.
American vs. European Style Options (Exercising Options):
There are two different option styles: American and European. The names don’t have anything to do with the geographical locations meaning that American style options aren’t only traded in America and European options aren’t only traded in Europe. The only difference between these options is the time when they can be exercised (so when the right to buy/sell shares of the underlying can be used). American style options can be exercised whenever the option owner chooses to. European style options, however, can only be exercised on the expiration date.
Note that exercising options has nothing to do with opening and closing option positions. Long option positions can always be sold to close and short option positions can always be bought to close. This means you can also trade options similarly to stocks (selling option positions for more than you originally paid for them)
To recap things, I want to give you a few more examples of options:
- 1 Long Call 55 Jul 20 (Underlying: EFG): The 1 stands for the number of contracts. ‘Long’ means that this option is bought. Call indicates the option type. 55 is the strike price. ‘Jul 20’ indicates the expiration date (20th of July). Buying 1 contract of this option gives the owner the right to buy 100 shares of EFG at $55 before the end of the 20th of July.
- 3 Long Put 460 Apr 20 (Underlying: ABC): Buying 3 contracts of this option gives the owner the right to sell 300 shares of ABC for $460 before the end of the 20th of April.
- 10 Short Put 110 Sep 21 (Underlying XYZ): Selling 10 contracts of this put option, could lead to the obligation to buy 1000 shares of XYZ for $110. The seller of the option has to buy these shares for that price if the buyer of that option chooses to exercise his options.
- 1 Short Call 55 Jul 20 (Underlying: EFG): Selling 1 contract of this call option, potentially gives the seller the obligation to sell 100 shares of EFG for $55. This depends on what the buyer of this option does. If he exercises his option, the seller will have to sell the shares.
The Option Chain
The Option Chain is a table where everything I described above is displayed. Below, you can see a Nasdaq option chain for Apple. On the left-hand side, you can see all the call options and on the right-hand side, you can see the put options for the selected expiration date. On the top, you can see the selected and select other expiration dates. In the middle, you can see the strike prices next to the ticker symbol of Apple (AAPL). The color shift about half-way through indicates the ATM (nearest strike prices to the current price of Apple) options. Other typical displays for an option chain are the Open Interest, Volume, and Bid and Ask Price. If you don’t know what these measures are, don’t worry. We will be discussing this in a later lesson. Most option chains are fully customizable meaning that they can display whatever you want to have displayed (things like Greeks and Implied Volatility, but more on that later).
Note that the prices of the options below all are under 14 $. This is the price for an option controlling one share of the underlying asset only. But options normally control 100 shares of the underlying asset. So you always have to multiply the price displayed on an option chain by 100 to get the ‘real’ price.
Nasdaq Apple Option Chain
I know that it can be very hard to grasp all the information at once. Most people first need some time to process everything. To help you do so, I created this short cheat sheet. I have summed up some of the basic options concepts on it. Back when I started to learn about options, I found this quite confusing and had trouble distinguishing the various option types.
To download this helpful cheat sheet either click here or the picture below.
I really hope that this brief introduction to options could give you a basic understanding of options. If you have any questions regarding the information above or anything else, feel free to comment and ask questions below.
Continue your training here: NEXT
26 Replies to “Stock Options Trading Basics”
Stock options, specifically calls and puts have always been something I have wanted to learn, but really haven’t had the time. Thanks for breaking it down in layman’s terms. It’s interesting that people can make money not only when the stock market is rising, but also when it’s falling. Is this a way for the average person to diversify a portfolio? Or is this better left to the professionals?
Many people think that options should be left to professionals and are very complicated. But in my opinion everyone can easily start including options in their portfolio for diversification or even for income as longs you get the right education
this content was very informative before reading this i knew nothing about stock options but after reading this i now have a clearer idea
So happy that you learned new things.
Great introduction on stock options. I am looking for a way to put my savings to better use. I am getting a late start on my retirement plan and I have been thinking about stocks and stock options as a way to build a better financial path.
Any recommendations on where to get more detailed info on this topic?
Hey Brendon, I am very glad that you liked my introduction to options. Regarding more information about options you can just keep on reading some of my other articles on this site. I am updating and adding more educational content nearly everyday. Otherwise you can later check out my recommendations for other sites under the review tab.
Wow, it was really interesting, I enjoyed reading. Look forward to reading more good materials on the subject. Thank you for sharing this!
Good that you enjoyed the read. I hope you will enjoy my future content as well.
Informative article Louis! I’m into stock investing and forex trading. I want to learn more about stock options. I will sign-up to your newsletter. I want some another regular stream of income like in my forex trading and stock dividends. Thank you!
My pleasure to help. The newsletter is a great idea. But if you want to learn more about options specifically you may want to consider my education section here:
In there I will teach how to trade options for consistent income.
Great article on the breakdown of options. I’ve always been confused by how they work, but this actually cleared up a lot of my questions. Just curious, it looks like there are options in pretty much any market out there including stocks which I know you’re talking about. I assume you recommend as a new trader that stocks are probably the best choice, but can you confirm?
Great question! I actually have a complete article on that question. You should definitely check it out here.
This is one of the best descriptions of options buying I have read. It’s a complex stock order to understand, but once its understood it can be so useful. I had an account that I used to trade options and did well when the US market fell through the early 2000s. At that point it was easy to see large trends such as the collapse of the luxury market and retail sector. Now I am into the cannabis market which is mostly penny stocks, but its good to know how to trade options.
Thanks for sharing.
Just finished reading this page of option trading basics, and listening to the video, and it was great! You are doing a great job here, and you deserve at least a BIG THANKS!
Currently I am selling Puts option only, keeping cash money in my margin account to cover myself in case the buyer will assign it, and I will have to buy the shares… I sold also once a “covered call”, which I was previously assigned.
I don’t know much of strategies and I am not familiar with implied Volatility and other indicators which you are using.
Looking forward to learn more deeply of Option trading, by reading and listening to what you have on your web site.
Thanks again for all of what you do here, for free!!
Thanks so much for the kind words! I really appreciate them. Hopefully, you will learn a lot.
Just finished the Beginner Quiz. I guess Now I will have to start the “Intermediate Course – Pricing Greeks” – Is it correct?
BTW – The quiz was not so easy for me. But I managed to pass it in first iteration.
Congrats on the fast progress! You can view the course outline for the intermediate course here. The first article is the article on Greeks. Have fun learning and please let me know if there ever is anything that you don’t fully understand.
Hi Louis, I am a long time trader (day trader) who has only been using securities up until now but I just start fast-trading options this last week and was very pleased with the results. I have a lot to learn and I just found your site, but I think I will be spending some time here this weekend soaking up what I can. Thanks for all the information.
Right now I only have the right buy long calls and puts, and to sell covered calls of course. But I am starting to think you really need to be able to sell calls & puts to have really fool proof strategies with options. But I am not sure what a trader needs to qualify for selling naked puts & calls since the exposure is unlimited.
Thanks for the comment Paul,
It’s great to hear that you found my site and want to learn more about options.
Being eligible to do more than just buy calls and puts is definitely something an options trader wants. The specific requirements may vary from broker to broker. So, I can’t tell you with complete certainty what the requirements are for your broker. Ideally, you should contact them to learn about all the details.
However, I can definitely tell you how most brokers handle this. First of all, you need a margin account to sell naked options. You can not sell naked options in cash accounts. Most brokers have minimum deposit requirements for you to be able to trade on margin. A common minimum figure here is $2000.
Besides that, a lot of brokers require you to answer some questions about your options trading knowledge. Based on your answers, they will evaluate your experience. So basically there they decide wether they think you can handle naked options or not.
But note that there are countless options strategies that have defined risk and therefore, normally can be traded in most accounts. Even if your account isn’t eligible for naked options selling, you should be allowed to trade these defined risk options strategies.
For instance, instead of selling a naked call that has undefined risk, you could sell a call and buy a call that has a higher strike price. This strategy would be similar to the naked call but it would have defined risk. This is just one of many examples. If you follow my training, you will learn more about this.
Hopefully, my answer helps. If it doesn’t or if you have any follow-up questions, please let me know.
Yes, that is a good answer. I don’t know the names of all the strategies yet, but I know about the one you just described.
Thanks for the answer. I started trading a lot more options last week and I am sure I will have the hang of it before long. After I get more experience I will ask my broker to extend my selling privileges.
The more I do it the easier it gets, and the more I know what to look for. For example, you said “take profits.” – I agree, with the IV it does not pay to sit in a position for too long. I have some experience with wide spreads, but I also found out my broker will trade options for me at “market” prices and I usually get filled at higher than the bid – so that is good (even if I submit a bid order they usually improve it some).
I also learned a lesson about high-price high volatility options, and I got on the wrong side of them. That was not a fun experience.
It seems as if that even with all the strategies – the hardest thing is not learning which strategy to apply, it is really just picking the best securities, times and prices to buy in. I am finding I can make more on very short term trades than on longer ones as long as I watch the momentum and take profits.
Thanks for sharing your experiences. I really appreciate it.
Options can be traded for the short term, for the long term and everything in between. One way isn’t necessarily better than the other. This just totally depends on personal preferences and on the strategy. If you prefer short term options trading and if you have found a good working strategy for that, then that’s great.
Just make sure that you completely know what you are doing before you risk a lot of money.
It seems to me that you are trading options very directionally (which is typical for short term strategies). It can be hard to predict very long term price movements. So that may be one reason why you are struggling with long term results.
You might want to check out some non-directional strategies. These don’t necessarily require you to predict price movement correctly.
But like I said, if you are having success with your trading style, then that is awesome.
“He will have to sell shares of XYZ to Thomas”, I think you are wrong here, it has to be “He will have to sell shares of XYZ to Christian” to make sense, correct me if i misunderstand.
Yep, you are absolutely right. Thanks a lot for pointing out the mistake. I just corrected it.
Your website is amazing and looking forward to finishing all the lessons. Thank you for all the work and time you committed to the trading community. I have a question regarding one of your examples.
10 Short Put 110 Sep 21 (Underlying XYZ): Selling 10 contracts of this put option, could lead to the obligation to buy 1000 shares of XYZ for $110. The seller has to sell these shares for that price if the buyer of that option chooses to exercise his options.
Would the seller not have to buy these shares if buyer exercises their right? You have… seller has to sell.
Thanks so much for your kind comment.
You are absolutely right. It should say: ‘The seller has to buy these shares for that price if the buyer of that option chooses to exercise his options.’
Thanks for pointing out the mistake.
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