Getting started with options: What, Where, When and How much should I start with?

What are options? (Credit: Investopedia)

Options are a type of derivative security. They are a derivative because the price of an option is intrinsically linked to the price of something else. Specifically, options are contracts that grant the right, but not the obligation to buy or sell an underlying asset at a set price on or before a certain date. The right to buy is called a call option and the right to sell is a put option. People somewhat familiar with derivatives may not see an obvious difference between this definition and what a future or forward contract does.

When, Where and How do i start?

Most people will do the first thing that comes to mind which is jump right in and fund their account all because they see big gains on twitter.. STOP RIGHT THERE!!! 

When? Its up to you! If your looking to expand different strategies this is a good one to learn.

Where? and How  Start by paper trading with fake money to get an idea of how things work. Thinkorwim offers a simulator. Below is the link. Try it out for a few weeks even to a month.

How? How much does one need to start? The amount is up to you. Its what you are comfortable willing to risk. I personally feel start small and build it. If you have a 10k account start with trades in range between $50-$150 this way you are managing risk.

Probability of profit vs. probability of loss ( Credit: Understanding Risk Schwabs)

For traders who define risk as the probability of profit vs. probability of loss, the amount at risk is generally a lesser consideration, because a loss is not anticipated. This type of trader will typically focus on strategies in which the probability of profit is much higher than the probability of loss. Assuming the trader’s forecast on the underlying security is ultimately correct, a single use of any of the following strategies would generally be considered low risk:



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