Trading Options to Pay for College

NEW YORK (MainStreet) — Entering the world of options can be daunting and intimidating. Entering world of options uninformed can be downright dangerous. However, properly preparing yourself for this trading instrument can be one of the most rewarding financial decisions you can ever make.

Rather than describing all the steps needed to begin trading options, I'll simply explain how I got started.

I first discovered what an option was when I was reading Jim Cramer's Getting Back to Even (Simon & Schuster, 2009). I had heard the word "option" being thrown around on CNBC before, but I always perceived it as something too risky for a young investor like myself. However, Cramer introduced options as something that you shouldn't be afraid of, but rather something you should consider having in your portfolio. He explained that, despite popular belief, options can actually be a conservative investment.

This was surely antithetical to my perception of options, and it intrigued me to learn more.

After finishing the book, I went to my existing E*Trade account, and clicked on the education tab. There, I found a huge number of videos and write-ups explaining simple option strategies, as well as very complex ones. I stuck with the basics.

After feeling comfortable with my level of knowledge, I typed in the ticker symbol for Caterpillar (CAT), clicked the options chain, and attempted to buy put options, because I believed the stock would fall. But there was one problem. My order did not go through, because I had not been "approved" to trade options.

While options can be a conservative strategy, they require more knowledge than typical stock trading, because they are a more complex investment tool. It is for this reason that brokerages determine, based on knowledge, experience, income, and other factors, the level of options you are approved to trade. Some investors may only be able to do basic things, like purchase calls and puts, while some may not be approved for any options trading.

I, of course, was denied.

,p>So I decided to try another brokerage firm. TD Ameritrade? Denied. Scottrade? Denied. Even though I had educated myself on the basics of options, I couldn't find a brokerage firm to approve me for options trading.

 

I finally found my answer with OptionsXpress where I was automatically approved. My theory is, from their point of view, beginners will likely reside on E*Trade, TD Ameritrade, and the other popular platforms. But, if you are specifically coming to OptionsXpress, then you must have a decent level of options knowledge. Whatever the reason, I was thrilled to finally be trading options.

Since I have been trading options, my portfolio performance has improved drastically. I went from double digit gains to triple digit gains in many stocks. As a college student, this makes the outrageous cost of education a bit less burdensome.

Getting started in options is not the easiest task to undergo, but the rewards can be life changing.

While there are entire books written on options, chapter seven in Getting Back to Even has one of the most straightforward explanations you'll ever see – it is a must read for any beginner. After this book, I suggest you go to the website of a popular broker, and digest the material in the education section.

Once you have educated yourself and been approved to trade options, you can start to get rich off this investment tool that so many are afraid to consider.

--Written by Alex Pottmeyer for MainStreet

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