Options Greeks Definition - How to Calculate

While numerous asset classes and types are available to build a balanced investment portfolio, options are more lucrative than other financial instruments. Note that this investment type entails buying and selling particular assets for a predetermined price. If you do it correctly, options trading can be very profitable. To do that, you need to know what platforms you can trade options on. Find out more in this article.

Options Greeks Definition - How to Calculate
Options Greeks Definition - How to Calculate

Introduction

While numerous asset classes and types are available to build a balanced investment portfolio, options are more lucrative than other financial instruments. Note that this investment type entails buying and selling particular assets for a predetermined price. If you do it correctly, options trading can be very profitable. To do that, you need to know what platforms you can trade options on. Find out more in this article. 

Did you know that stock option volume soared in 2020? This is because individual investors piled into the market, gravitating to hot stocks, such as Apple, NIO, and Tesla. Keep in mind that daily volume in single-stock options averaged about 17.3 million contracts during 2020, representing an increase of 68% from the 10.3 million daily (average) for 2019.

You should know that to start trading options, you must have a trading account with an options brokerage. After setting up your account, you will be able to place options trades with your broker who will then execute the trade on your behalf. You may know that every broker sets its unique rules and regulations. For example, some options brokers are a little strict, while others have lax or lenient criteria for approval.

Understanding Permission Levels

Trading options is a bit more complicated than trading stocks, and under some circumstances, options carry unexpected levels of risk. This is why some brokers have set specific permission levels. And because of the inherent leverage in options as well as the counter-party risk associated with writing options, many brokers have created a tiered system of option approval levels for investors and traders that limit their access to options trading.

Keep in mind that to keep investors and traders from getting in over their heads, brokers have developed four levels of options trading. Did you know that gaining approval in order to move through these levels requires verification that you satisfy certain basic eligibility guidelines? For example, the first option approval level or Level 1 is for covered calls and cash-secured puts.

In level 2, brokers check your ability to purchase long calls and puts and in Level 3, they will check your ability to trade Butterfly Spreads, Iron Condors, and Vertical Spreads. Finally, in level 4, as a trader, you can trade short straddles and strangles.  

It is easy to get approval for options trading with the right guidance. How can you get approved for options trading? Follow the steps given below.

1.     Choose a Broker

There is no doubt that the first and most important step is to choose the options broker you would like to trade with. And for this, you should perform an online search. You can also ask for suggestions and recommendations from expert traders. Furthermore, there are websites such as https://topbrokers.com/ and https://www.forexbrokers.com/ that provide extensive analysis on brokers. These websites help traders to choose the best reliable brokers for them. By taking advantage of resources like this, traders can increase the likelihood of success in the forex market.It is best to choose a broker with no commission fee.

To choose the broker that will meet your needs, you should have a solid understanding and grasp of trading under your belt before diving into options.

After that, you should outline your investment goals and objectives, such as generating income, capital preservation, and growth or speculation.

This is because your broker might have additional requirements, like disclosing your personal net worth or the kinds of options contracts that you want to trade.

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Before choosing an options broker, you may also like to review the specifics as well as operational mechanics of any particular options contracts that you plan on trading. This is because missing an expiration date, or not knowing and understanding the amount of risk you’re taking can be costly mistakes. 

While many online brokers, such as Webull and Robinhood, will allow you to trade options, you have to choose a well-regulated broker that provides options on the specific asset classes that you want to trade as well as an excellent options trading platform.

You should take some time to write your investment goals, like how much income you would like to generate, and how much capital you have for investment. Once you’ve a better picture of your overall financial goals, start looking for a broker to work with.

The broker will assess your financial readiness, helping you open an account. And if you already have a stock trading account with a broker, in some cases, all you have to do is complete the application and answer a few questions. 

2.     Complete the Broker’s Application Form

After you have finalized the broker, you should visit their website. Here you will get an application form to fill. At this stage, it is important to review your broker’s account types and initial deposit requirements to determine what will best suit you. Here are two common account types.

Margin Account

Did you know that a margin account is a brokerage account where the broker lends you cash in order to purchase stocks, options or other financial products? And the loan in this account is usually collateralized by the various securities purchased and cash, and has a periodic interest rate.

Cash Account

On the other hand, a cash account doesn’t have the benefits of a margin account. This simply means that you have to cover your trade's full purchase price using the funds already in your account.

Also, familiarize yourself with the broker’s margin requirements for various types of options strategies so that you can have enough funds deposited in your trading account to cover the options you want to trade. 

The application form will also include short questions regarding your trading experience and personal information. For example, you will have to disclose certain details if you wish to trade options on Robinhood. Here is what the application generally requires from traders:

  • Investment goals and objectives
  • Investment experience and knowledge
  • Financial data (e.g., annual income)

Once you have submitted the relevant information, the broker will assess it and decide whether to approve you for options trading or not.  

Did you know that traders who wish to engage in Level 3 options trading usually undergo a thorough evaluation on many platforms? For example, Robinhood and Ally Invest determine if you are eligible according to the previously mentioned criteria (experience, investment objectives, and income).

As soon as the assessment is complete and you are approved for Level 3 trading, you may perform all Level 2 operations, and the following advanced trades:

  • Iron butterflies
  • Credit spreads
  • Iron condors

In the meanwhile, you can use paper trading to improve your skills. Note that a paper trade is a simulated trade. It allows you to practice buying and selling options without risking real cash or money. The first and main benefit of paper trading options is that it lets you get familiar with your broker’s trading platform before committing real money. 

3.     Answer the Questions

This is an optional step for many brokers, but for some it is compulsory. After you fill the application form, the broker you have chosen may ask you specific questions. The platform will evaluate if you are eligible for specific levels of trading, depending on the information you provide. Be confident and answer all these questions honestly.

4.     Add Funds to Your Account

Once you’ve prepared yourself for options trading by following the above steps, you are all ready to begin trading options with your live account when you identify an appropriate opportunity in the market.

After getting approval it is essential to update your account and add money. Adding funds to your account is simple; you can simply add money using a bank transfer. It is important to make sure that you’ve placed sufficient funds on deposit with the broker as margin in order to support all your options trading strategies. You should trade only with funds you can afford to lose. 

Also, note that if you already have funds in your stock brokerage account, you may directly transfer your funds from that account. Many brokers offer a variety of ways to easily fund your account. For example, Ameritrade, gives you many choices in this regard so that you can quickly and easily start trading.

 Whether depositing funds, rolling over an old 401k, or transferring funds from another brokerage firm, you can find the method that is best for you.

Also, keep in mind that every broker charges differently. Did you know that nearly all brokers will allow you to open an account with a minimum deposit of $5000? Few brokers, however, will allow you a minimum deposit amount as low as $2000. Also, read the terms and conditions of your broker carefully.

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5.     Choose Stock Options or Index Options

After you have updated your account and added funds, it is time to decide whether you would like to trade in stock options or index options. Stock options and index options are quite similar; however, there are also some notable differences. For example, with index options, you know for certain whether the position is short or long the market.

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In contrast, traders using stock options (also known as equity options) aren’t dependent on a complete market outlook. Instead, they are focused on predicting and anticipating the direction of a particular underlying stock or equity.

In many cases, investing in index options is much better than stock options. The reason is simple; index options are usually less costly and do not require income reports and analysis of individual companies.

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You should know that generally, options volumes increased in 2020 despite the COVID-19 turmoil. And total options volumes reached 47.3 million contracts on Feb 28, 2020, representing an increase of 119% from the beginning of the year.

And equity options peaked in Mar 2020 at 26.4M contracts, representing an increase of 41.5% versus previous year’s peak. On the other hand, index options peaked in Mar 2020 at 3.2M contracts. This represented an increase of 43.2% versus previous year’s peak.

6.     Choose Sell or Buy Option

As you may know, options trading requires that you know and understand new terms, such as puts and calls. So, once you’ve approval and are ready to start your options trading journey, an excellent and helpful starting point is to fully understand what puts and calls are.  

Here is an example. A call option is a binding contract that gives the owner the right to purchase 100 shares of an underlying security at the strike price. The owner can exercise this right any time before your option’s expiration date. And the seller of the option must sell the shares if the owner decides to exercise their right to buy. 

On the other hand, a put option is a binding contract that gives the option owner the legal right to sell 100 shares of the underlying security or share at the strike price. This right can be exercised any time before your option’s expiration date. Similarly, the seller of the stock option has the legal obligation to purchase the shares if the owner decides to exercise their right to sell. 

7.     Execute the Trade

Keep in mind that after considering the stock value you can either chose to sell or buy. You will do this prior to the expiration date of the stock option you own. You have to know and understand how to navigate the options market, and start with executing trades. It is worth noting that entering an order through the Internet on the broker’s system often triggers a very fast series of events.

The order is usually routed to one of several exchanges where it is executed if it satisfies the existing market quote. The best thing is that to keep a close and watchful eye on the stock price, you can even set alerts via an online broker.

Keep in mind that some options trading strategies are much riskier than others. This is why you should understand the trading system well before getting approval.

Final Thoughts 

As you can see, you need approval from the broker before starting options trading. And it is the broker’s right to approve or deny your application. Be careful when completing your application and fill it to the best of your knowledge to start trading options.

Options are among many investment vehicles that you can use in order to develop a successful and profitable financial portfolio; however, it will require some work and dedication on your part.  

The best thing about options is that they provide you with many ways to express a market view. Since options are likely to add considerable complexity to your trading activities, you would like to educate yourself thoroughly and comprehensively about how to best use them so they improve your bottom line. 

If you are a beginner, and your application is rejected, don’t worry. In this case, your broker might advise you to spend some time on trading options on a Demo account.

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