It is easy to own stocks and make a little profit. However, one needs to trade options to make a profit from the stocks. Trading options can be a little complex at first, but not when you understand everything very well.
Options were initially made with the idea to transfer the risk from one trader to another trader. People generally trade options for either of these three reasons:
- As a speculative tool
- As a hedge
- As a source of additional income
The best thing about trading options is that there is no right or wrong way of trading. Instead, one can use multiple strategies to trade them based on the individual objectives and risk tolerance ability.
To begin trading options, you need first to have options approval. Let us see how to get approved for options on TD Ameritrade:
TD Ameritrade Options Approval
To get TD Ameritrade options approval, you need to do the following steps:
- Log in to your TD Ameritrade account
- Select My profile under the Client Services tab
- Find General Tab and check your approval status for options trading.
- If you aren’t already approved, click on the linked text to redirect you to the application and the form for options agreement.
- Once your application gets approved, you will be ready for options trading.
The first thing to learn after approval is what are calls and puts. A call option contract permits the owner to purchase a hundred shares of the underlying security anytime before the option’s expiration date at the strike price. In this case, the seller of the option is obligated to sell the shares when the owner chooses to buy them.
A put option contract provides the owner with a right to sell a hundred shares of the underlying security anytime before the option’s expiration date at the strike price. In this case, the seller of the option is obligated to buy the shares when the owner chooses to sell them.
What is selling a put and selling a call called?
Selling a put and selling a call is called a short straddle and represents an options strategy that sells both a call option and a put option with the same strike price and expiration date. Common ways to sell options are:
- Selling call option contracts: The seller of a call option must supply the underlying asset whenever the buyer exercises the call contract at the strike price. In this case, the option seller is known to be “assigned.”
- Selling put option contracts: The seller of the put options must purchase the underlying asset whenever the buyer exercises the put contract.
What is it called when you buy a put and a call option?
Buy a put and buy a call is called a long straddle and represents an options strategy comprised of buying both a call option and a put option with the same strike price and expiration date. Common ways to buy options are:
- Buying call option contracts: The buyer can choose to buy the underlying stock at the strike price. However, they are not obligated to do so.
- Buying put options contract: The put option buyer can sell the underlying asset at the strike price. However, they are not obligated to do so.
Even though this process might seem a little intimidating at the moment, whenever you start trading options, things will automatically become clear to you.
How to sell covered calls on TD Ameritrade?
- To sell covered calls, you need to short an OTM call against the stock you own.
- When OTM expires, you can keep the stock and sell another call if you want.
- If the stock moves above the call’s strike price, you can r let the in-the-money (ITM) call be assigned and deliver the long shares.
- Additionally, you can take a loss on that call when the stock moves above the strike price, and you can repurchase the short call before expiration and keep the stock.
If the objective behind entering options trade is to earn additional money, then you can try selling and writing a covered call.
When a call option is sold, a premium equal to the price of that option is collected. This premium amounts to your income from the trade. However, this does not mean that the trading options with the maximum compensation are consistently profitable. To analyze the best investment, you must look up the risk and reward trade-offs by analyzing what you are risking and what you will gain. For instance, if the risk profile of any covered call appears in figure 1, it means that profit is limited and the risk involved is unlimited. Further, you must remember that all options contracts have an expiration date, and thus, you cannot always keep it with yourself, expecting the price to scale up or down to your desired level.
Here is an example to get you started:
A standard options contract stands for 100 shares. Pick a stock from your portfolio:
- You have at least 100 shares of
- Are you currently trading at a higher price than when you bought it
- You assume to move up only slightly or not at all in the coming period.
How to trade options on TD Ameritrade?
To trade options on TD Ameritrade you need to do the following steps:
- Check did you get approval to trade options at Ameritrade at Client Services/ My profile/ General tab.
- Go to the Trade tab and choose Options.
- Study the options
- Choose Underlying symbol
- Define Strike Price and Expiration Date
- Review order
- Make a trade
Step 1: Study the Options
Open your options trading account and study your options in detail. Here, you can view all option contracts’ expiration dates and strike prices in the analyze tab.
Click on the Trade tab to enter the symbol of the stock you have chosen. The underlying stock details will appear at the top of the page, followed by the option chain below it listing the expiration dates. Each date displayed will have multiple strike prices visible by clicking the drop-down arrow on the left of the date. The option chain will show the calls and puts prices for the expiration date chosen. Calls are displayed on the left, and puts are displayed on the right, organized by the strike price. There is also an option to customize this layout which you can try as you progress in the trading journey.
Step 2: Select the Strike Price and Expiration Date
Initially, it is best to select an expiration date three weeks – 2 months ahead to play safer. Choosing the expiration date will show you a premium for the risk you are taking. The risk and reward profile of the trade gets majorly determined by the strike you choose to sell and the current price of the underlying stock. Further, another essential factor is to consider: should you sell a call with a strike price the same as, lower than, or higher than the ongoing stock rate?
Here is what you should know:
- The call option will be in the money if the strike price is lower than the current stock rate (ITM).
- The call option will be at the money (ATM) if the strike price is similar to the stock rate.
- The call option will be out of the money (OTM) if the strike price is higher than the current stock rate.
It is best to sell an OTM call if your outlook is bullish on the stock. The premium will be less than an ITM and ATM call. However, if the stock price goes up, you can make more money. On the other hand, if you are neutral, then choose to write an ITM or ATM call. It will provide a chance to get a better premium than the OTM call but accompanied with upside profit probability for the stock.
Step 3: Start the Trade
Click on the trade tab and select the strike price. After this, click on the sell option and then on the single option. Next, select the bid price to create an order, followed by a sell option and a single option to place your trade.
Step 4: Send the Order
You will see your order presented in the order entry section appearing below the option chain. The price here can alter based on the time when you place the order. There is also an option to review your order before placing the trade in the order entry section. It is suggested to double-check all the details you have selected and then alter the number of contracts to one. Further, if you are satisfied with the chosen options, go ahead and click on confirm and send. After confirming, a dialog confirming your order will appear, mentioning details like break-even price, maximum profit, maximum loss, and the trade price. If all the points mentioned are to your liking, click on the Send button to start the trade. It is the last step in successfully making your first options trade.
However, do not forget about the trade you have made, even though it is in a simulated account. You must keep observing how the trade works and add to your knowledge. The three possible trade scenarios are:
- The stock price goes down: In this scenario, your option will expire without any benefit. So even though you can keep the premium amount, the value of the stock you hold will decrease.
- The stock price remains below the strike price: Your option will expire without any benefit in this scenario, and you can keep the premium amount.
- The stock price rises above the strike price: The option buyer chooses to exercise the call in this scenario. Therefore, you will have to trade 100 shares from your stock at the strike cost. However, you will get a profit consisting of the premium cost, along with the difference between the strike price and stock price, reducing the transaction cost.
There are multiple strategies and choices while trading options. You only have to find the system that suits you best. There are other advantages of covered calls besides collecting premiums. As you go ahead in your journey of trading options, you will get a sense of how to manage risk and make the best moves. You can eventually build strategies that help you derive the maximum profit.
Trading options can be a piece of cake once you get the hang of them. It can provide good profits without much effort. However, you must fully acquaint yourself with the trade options proceedings to play safe and derive maximum profits before entering a trade.