Options Trading Basics
Once you have a good grasp of the basic nature of options, it is time to look at how to trade them for a profit. The first step you need to take before you can start trading options is to setup an account with a broker that offers options trading.
Cash vs Margin Account
When opening an account with an online options broker, you will be asked whether to open a cash or margin account. The difference between a cash account and a margin account is that a margin account lets you use your existing holdings (eg. stocks or long-term options) as collaterals to borrow funds from the brokerage to finance additional purchase. With cash accounts, you can only use the available cash in your account to finance all your stock and options trades.
There is no deposit required to open a cash account while federal regulations require a deposit of at least $2000 to open a margin-enabled account. For beginners, we recommend you open a cash account first since no deposit is required. You can always switch to a margin account later on when you are more experienced.
Virtual Trading
Many online options brokers nowadays offer what is called a virtual trading account where you can simulate actual trading using fake money. Once you have opened an account, familiarize yourself by trading with the virtual money first. Do take your time to get comfortable implementing the many trading strategies as well as getting used to the user interface before you plunge in with real money.
