Table of Contents
Introduction
Investing in options can be an exciting way to make money and a great way to diversify your investment portfolio. E*TRADE is one of the biggest online stock brokers and offers a great options trading platform for both new and professional traders. In this article, we will explain the basics of strategic investing through E*TRADE’s options trading, the basics, techniques, and resources that can help you make the right investment decisions.
Understanding Options Trading
Before delving into E*TRADE’s options trading platform, it is important to have a clear idea of what options trading is. Options are derivatives of financial instruments that provide investors with the right to buy or sell an underlying asset at a set price until a specific date.
There are two types of options: calls and puts. A call option is a type of option that gives the owner the right to buy the underlying asset while a put option is a type of option that gives the owner the right to sell the underlying asset. Options can be used for a number of purposes including speculation, protection, and income.
While trading options it is important to know about strike price, expiry date and volatility. The strike price is the price at which the underlying asset can be bought or sold, whereas the expiration date is the date by which the option contract is valid. Volatility is the rate of price change of the underlying asset.
E*TRADE's Options Trading Platform
E*TRADE provides its clients with a convenient and intuitive options trading platform that offers all the required functionality for implementing your options trading strategies effectively. The platform provides a vast selection of options include equity options, index options and ETF options.
Another key feature of E*TRADE’s options trading platform is the options chain which is quite active and enables investors to sort and analyze different options markets based on their preferences. The options chain contains information on the market such as the bid and ask prices, the trading volume, open interest, and implied volatility.
E*TRADE also provides the advanced options trading tools like options screeners and strategy builders which can be used by the investors to identify the potential of trading and to create complicated options strategies. These tools help the investor select options contracts that meet certain criteria and determine the risk and reward of various option strategies.
Developing a Strategic Approach
When it comes to options trading, without a plan, one is likely to lose money in the long run. Here are some key strategies that beginners can consider when trading options on E*TRADE:
- Covered Call Strategy: This is a strategy of writing call options on a stock which the investor already owns. It is a way of making money from your current stock position while reducing the risk of loss in the event of a market decline.
- Protective Put Strategy: This strategy includes the purchase of put options on an asset to reduce the risk of declining prices. This strategy can be useful for those who want to invest in the market and are worried about the market’s trends.
- Long Call Strategy: This strategy implies the purchase of call options on a stock or an index with the view to sell them at a higher price later on. It is a way of capturing the upside in a market that is expected to rise, without having to own the underlying asset.
- Long Put Strategy: This strategy is based on purchasing put options on a stock or an index with the aim of selling them at a higher price in the future. It can be a way of making money from the market conditions that are likely to be bearish without having to sell the underlying asset.
These are just a few examples of the many options trading strategies that investors can employ. It is very important to know every strategy and its workings before attempting to use it in the real world.
Case Study: Using E*TRADE's Options Trading Platform
Let’s create a hypothetical example to show how the options trading feature of E*TRADE can be useful for the covered call strategy. For instance, you own 100 shares of XYZ stock, and the current price of the stock is $50 per share. You think that the stock will not go up or down much in the near future and therefore you are looking to earn more from the stocks you own.
Using the options chain on E*TRADE, you can look for call options with strike price just a little above the current market price of XYZ stock. Let’s say you find a call option with a strike price of $55 good for expiry in one month. The call option is currently being offered at $2 per contract The price. You decide to sell one call option contract that represents 100 shares of the XYZ stock. Selling the call option pays you a premium of $200 ($2 per contract × 100 shares). If the price of XYZ stock stays below $55 at expiration, the call option will expire without being exercised and you keep the premium as income. If the price of XYZ stock rises above $55, the call option can be exercised, and you will be required to sell your shares at $55. This is because case study shows that how can we put our strategy into action using E*TRADE options trading platform. With the help of the options chain and order execution system, investors can go about their options trading as easily as possible.
Conclusion
E*TRADE’s options trading platform offers many features to beginner investors to help them in their investment decisions. This paper aims at explaining the basics of options trading, identifying the features of the platform, and designing a strategy for investment with the help of the provided list of options. It is always important to know the risks of options trading before getting into it. Options trading is a high-risk trade and is not for everybody. It is always wise to seek the opinion of a financial adviser or other licensed professional before getting into options trading. E*TRADE’s options trading platform provides a set of tools and resources for investors to be able to strategically invest. This paper hopes that through the understanding of the basics of options trading, the exploration of the platform’s features, and the development of a strategy, investors will be able to make better investment decisions and possibly gain higher returns on their investments. There is never a loss for being informed in the options trading arena and seeking professional advice before engaging in the process. E*TRADE’s options trading platform gives investors a chance to learn about options trading and perhaps discover new investment possibilities. So why not start your options trading journey today and take advantage of the many tools and resources available to you on E*TRADE?
