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.