Getting Started in Options Trading

To start trading options, you will need to have a trading account with an options brokerage. Once you have setup your account, you can then place options trades with your broker who will execute it on your behalf.

Opening a Trading Account

When opening a trading account with a brokerage firm, you will be asked whether you wish to open a cash account or a margin account.

Cash Account vs. Margin Account

The difference between a cash account and a margin account is that a margin account allows you to use your existing holdings (eg. stocks or long-term options) as collaterals to borrow funds from the brokerage to finance additional purchases. With cash accounts, you can only use the available cash in your account to pay for all your stock and options trades.

Minimum Deposit

There is usually a minimum deposit required to open a trading account. The amount required depends on the type of account that you are opening as well as the brokerage firm. Little or no deposit is required to open a cash account while federal regulations require a deposit of at least $2000 to open a margin-enabled account.

Online Brokerage vs. Offline Brokerage

To trade options effectively, I find it necessary to trade via an online brokerage account as there are simply too many variables in a typical options trade, as compared to a stock trade. Having to communicate too many details in one trade to your broker over the phone also increases the chance of miscommunication which can prove very costly.

With technology so advanced these days, online brokerages for options now offer highly intuitive user interfaces where it is far easier to place option trades online than having to do it over the phone. Moreover, while a human broker can only handle one client at a time, online brokerages can handle thousands of orders simultaneously. Thus, it is no coincidence that the rise of option trading also coincide with the rapid advancement of internet technologies.

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