Buying options may be a little tricky for the new trader or investor.
However, with the ever-increasing amount of online training resources; YouTube videos; and now Option Trading Coach at your side – buying options has never been this easy. There are some important factors involved with buying options such as: risk profile, time decay, and volatility. However, for the matter at hand, I am going to keep things as simple as possible and save the more advanced stuff for later.
Now, considering you have a brokerage account that is approved for options trading, then you would want to ask yourself the following questions before buying an option:
Am I bullish or bearish on the stock?
- If bullish, then you want to buy a call option
- If bearish, then you want to buy a put option
What is my time frame for the trade to manifest?
- If you just want to make a few quick bucks as a swing trader, in a couple of days, you could buy a front-month or near-term option (expires in 1-3 months) to get a larger percentage move without giving up too much time decay on the option(s) by holding it.
- On the flip side, if you want to ride up a several month trend buying a longer-term (expires in 3-12 months, be the proper choice. Also, on a long-term trading horizon, you have the option of buying a LEAPS option, which in some cases don’t expire for up to 3 years.
Where do I think the price will go?
- It is helpful to choose the proper strike price when you have a reasonable projection of where you think the stock price will go. When you have an accurate projection, it will help plan your entry and exit better, as well as give you more accurate insight on which strike price to purchase.
In conclusion on How to Buy Options, your first decision is whether you want to buy a call or put (the two types of options), then you determine which expiration month to purchase by deciding the most accurate time frame of the trade to manifest, and lastly you determine which strike price to purchase by using the help of technical and fundamental analysis methods.