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Fundamentals of Options Trading

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Options Trading is not as haywire as you think. This sequential process lets you know the fundamentals of options trading.

  • product list
    You can choose the available products from the list.
  • time frame
    Time Frame is a fixed period of time within which contracts run and expire
  • chart time
    You can see the chart of different times
Options Trading
  • Investment
    An Investment is the amount of money that you can choose to invest in an option
  • call
    It assures the trader a defined return if the call (exercise) price is higher than the current price
  • put
    It assures the trader a defined return if the put (exercise) price is lower than the current price

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What will you get in this section:

Over the last ten years options have been taking the investment world by storm. Who knew back in 2008 that options trading would become so successful that it would soon replace Forex as the most popular financial investment.

After going through a short introductory beginners’ level training, the average investor can understand the fundamentals of the options trading industry. The new form of trading provides greater market accessibility and simplifies the trading process like never before. With low cost entry fees and user-centric trading software, options trading has removed the barriers that previously made investing and trading in the financial markets out of the reach of the masses.

Traders take advantage of options trading to increase their portfolio diversity and accrue high returns on investments by trading via the Dual Options trading platform.

Options are a kind of financial investment vehicle, whereby investors open a position on the future direction of the underlying asset. The underlying asset can be a stock, commodity, currency exchange rate or index. An option is a type of asset in which the pay-out can take only one of the two possible outcomes- either some fixed monetary amount or nothing at all. In contrast, ordinary financial options typically have a continuous spectrum of payoffs. However, the Dual Options trading platform defies these stereotypes and allows clients to retain a percentage of their investment even if the trade was unsuccessful.

Options are derivatives whose value derives from and is dependent on the value of the underlying asset. As such, investors don’t actually own the underlying assets, unlike in traditional trading where investors actually have ownership of the assets they trade in. Nonetheless, to trade options successfully, investors need to perform analysis on the underlying assets and employ strategies to determine the right time to enter a trade. There is a high degree of skill and know-how required to trade options at the highest level.

In order to successfully trade options, you should educate yourself on the basics of options trading first. Indeed, it is recommended that you do! As mentioned earlier, options involve speculating on the movement of the value of the underlying asset. If a trader believes that the market of the underlying asset is rising, she/he would purchase a "Call" option. If the trader believes the market is falling, she/he would purchase a "Put" option. For a call to make money, the price must be above the strike price at the expiry time. For a put to make money, the price must be below the strike price at the expiry time. The strike price (execution price) is the level of the value of the underlying asset when the option was purchased by the client. The strike price, expiry, pay-out and risk are all disclosed at the trade's outset.

The trading process involves four steps

  1. Choose an underlying asset.
  2. Choose an “Expiry Time” – The expiry time is the length of time that the trade is open.
  3. Choose a “Call” or “Put” option – Choose a “Call” option if you think the trade will expire above your strike price, choose a “Put” option if you think it will finish below your strike price.
  4. Enter your investment amount.

Once the trade starts there is nothing left to do, except wait for the expiry time.

Investment strategies help traders to better predict the movement of an asset thus enabling them to trade successfully and maximize their return.

Prior to placing a trade, a trader should first conduct analysis, this can be either technical or fundamental analysis – a mixture of both, when possible is the best way to get a deep understanding of what is happening in any given market. There are many different types of strategies that can be employed when trading options; some are straightforward and easy to implement, others are very complex.

Trend Spotting

It should be noted that when we speak of trends in options, we are not usually referring to trends that last weeks or months, but more mini-trends, that last only minutes or hours. Major news events such as product launches, quarterly earnings reports, and monthly job figures reports, can cause assets to move strongly (trend) in a certain direction, up or down. This strong move can last for minutes, hours or days. A trader can profit from these trending market movements by simply taking positions according to the direction the trend is moving. It is imperative to monitor such major news in order to successfully invest and identify trends to trade in options. The key to implementing this strategy is to start placing trades, just after the news event occurs – and once you have confirmed a trend is indeed occurring.

Reverse Strategy

The reversal strategy can be used hand-in-hand with the trend trading strategy explained above. In order to implement this correctly a certain degree of knowledge of technical analysis is needed. The nature of trends (mentioned in the above paragraph) is that they will eventually even-out, or reverse. The savvy traders can predict with some accuracy, using charts, when a trend is likely to reverse – they can then continue profiting from the same asset, when the trend they were riding does a U-turn.

There are many benefits to investing with options as opposed to investing through more traditional trading vehicles.

Speed

With more traditional forms of trading it can take weeks, months or years before an investor makes even a small return. Options tend to be more short-term. On the Dual Options trading platform traditional options are available for 1-hour intervals. However, there are options available for longer intervals as well, such as “end-of-the-week” or “end-of-the-month” options.

Potential Profits & Returns

Contrary to traditional investments with options, traders can make potential profits of up to 60% while trading in the short-term. This level of return on investment is extraordinarily high. It should also be noted that there is risk of loss - if you invest $100 you can make a potential return of up to 60%, but you also risk losing $100 if the trade finishes out of the money. Remarkably, the Dual Options trading platform returns a percentage of the investment to the client, depending on the profit percentage selected, where an options trade was unsuccessful! In other words, there are pre-defined pay-outs for every position invested in which gives transparency and certainty to the trading activity.

Beforehand Knowledge

Options are a high-risk/high-reward form of investing. Unlike some other products available in the financial markets, traders know exactly how much profit they stand to make, and how much they might lose before a trade commences. This enables you to balance the total risk & reward before spending a penny and make an informed investment decision.

Access to the global market

Options put the global markets at your fingertips. Traders can choose amongst hundreds of underlying assets from stock markets around the world. The Dual Options trading platform currently offers up to 53 different options in 3 different areas.

Earn in both rising and falling markets

One of the major benefits of options is that traders can gain returns in any market condition - whether the market is rising, falling or moving sideways. So, no matter which way an underlying asset moves, by predicting the direction correctly, you can still earn. Whereas if you predict incorrectly, you will lose your initial investment.

Options trading signals have become very popular with both beginners and experienced traders alike. For beginners, signals help to expedite the learning process and quickly bridge the knowledge gap. For seasoned traders, signals allow them to place a greater volume of trades throughout the day besides being able to cross-check their own market analysis and assessment for extra validation. Although, trading signals can help increase profits and reduce the time spent analysing the markets – they are not fool-proof. The truth is that many signal providers have expensive monthly subscription fees, and the signals they provide are right 40% - 60% of the time. However, there are some signal providers with a success rate of 80%, or more. Similarly, like investment strategies, clients should evaluate and assess the various signal providers prior to implementing their recommendations. Signals are usually provided by 3rd party companies, and not by the options trading platforms themselves.

How do options trading signals work?

Trading signals are generated in two ways, either by humans (expert traders), or by software programs that use complex algorithms. In both cases, signals are created when a set of pre-determined parameters converge. These parameters incorporate a variety of technical indicators, chart patterns and other technical data to determine the most likely movement of an asset. In the case of human-generated signals, fundamental factors may also be added to the technical parameters.

Once a set of pre-determined conditions are met a signal is sent to the trader providing information on what to trade, when to trade and what direction to trade.

Options are traded through online trading platforms. Trading platforms provide options investors with access to the global markets. Dual Options, is considered the world’s leading options broker with a state-of-the-art trading platform. To begin trading through a trading platform you must first register and make an initial deposit – usually the minimum deposit is $200.00. Different platforms will have different underlying assets available to trade – some offering a wider variety of choice than others. Each broker will also have varying minimum investment requirements per trade - this can range anywhere from $10 to $100.

3 things to consider when choosing a trading platform:

As the popularity of options trading is increasing, options brokers are a dime a dozen these days! Care must be taken when choosing to invest your money with a broker. Not all brokers’ platforms are the same and some are less than reputable.

  1. Is the broker regulated? This is without doubt the first thing you should look for when reviewing a trading platform. Not only should you see if the trading platform is regulated, but you should also determine the level of regulation that the broker and platform are subject to. Not all regulated licenses are the same, some are more stringent. The Dual Options trading platform is licensed under the Cyprus Securities and Exchange Commission under license no 186/12.
  2. Customer satisfaction – Any trustworthy and reliable platform will have an abundance of positive online reviews and customer testimonials. Of course, every platform will have their detractors, but the good reviews should vastly outnumber the negative ones.
  3. Range of underlying assets – As we mentioned earlier, not all trading platforms offer the same range of assets and corresponding options. When choosing a platform, it is important to review the range of available financial instruments. As a trader you want to have as much choice as possible, this allows you to diversify and also maximizes trading opportunities.

Education is the key to being a successful trader. However, education does not just stop at knowing some strategies, and being able to conduct market analysis; yes, these skills are key components, but there are many more skills and much more knowledge to be acquired before you can consider yourself a well-rounded trader.

At Dual Options, we want our traders to be successful, and we provide complementary training resources & materials to help our customers achieve success. Not only do we provide on-site educational articles, but we also provide dedicated, step-by-step training resources.

Options is not for everyone, but if you like high-risk/high-return investments with fast turnaround times options trading is for you. Options put the global markets in the palm of your hand, opening up a world of trading opportunities, no matter whether you are interested in trading stock options such as Facebook and Twitter or more traditional assets such as indices or commodities.

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