The quest for options trading knowledge has been on the rise for years. It makes sense. Options trading can be a powerful supplement to stock trading for generating wealth. But investors have a lot to learn to be successful. To help bridge that knowledge gap, Investor's Business Daily launched its OptionsTrader app Jan. 30.
How Options Trading Can Help Build Wealth
Options trading gets a bit of a bad rap. It's often viewed as a get-rich-quick scheme with high risk and all-or-nothing bets. But options were created to help mitigate risks. When properly used and understood, they can be a powerful tool for hedging, leverage and information.
Hedging involves taking a contrary position to a position you already have. It can help protect gains or prevent big losses since the positions will act as a seesaw. When one goes down the other will go up. Options trading opens up hedging possibilities with just a small amount of capital.
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Leverage is the reason you need only a small amount of capital. It doesn't take much money to control a large amount of shares. When you are right on a trade, that means you have more profit potential. But always remember that leverage works both ways. Options trading can lead to larger profits but also bigger losses given the capital involved.
Even if you don't do any options trading yourself, the options market gives a stock trader useful information. Expected earnings moves, unusual trading volume and open interest are all clues and data points that show the hand of what investors are thinking.
The biggest downside with options trading is that everything comes with an expiration. Not only do you need to be right on your analysis of direction, you also need the trade to act as expected before the expiration. If you are right on the trade but wrong on your timing, it does you no good.
Another downside for many traders is that options require another level of study.
'It's All Greek To Me'
One of the most intimidating parts of options trading is that it can feel like you need to learn a new language. Strike prices and expiration dates are easy enough to understand. But to figure out how options prices change, you eventually need to know about the "Greeks." Not literally the Greek language, but the factors (represented by Greek letters) that influence changes in the option prices. Remember the craziness with meme stocks like GameStop? Options were a catalyst as traders implemented a "gamma squeeze" that shot the stock up in a nearly vertical fashion.
On top of that, it's important to understand the rights and obligations that come with buying and selling options and how to set up strategies to match your risk profile and projection of market action. To that end, the new, free-to-download OptionsTrader app has a whole section of education defining the terms that are unique to options trading and how to put the parts together to follow different strategies.
The app starts with single-leg strategies, simply buying or selling calls and puts. From there, the OptionsTrader app moves into more complicated strategies like spreads. Videos and images are also included to help solidify your knowledge, and you can test your understanding with short quizzes on each subject.
OptionsTrader Offers Lessons, Strategies And Research
At the heart of it, the new OptionsTrader app takes the subject of options trading and makes it accessible for beginners. But it doesn't stop there. Once you have the foundational knowledge, you'll have opportunities to build on it with different strategy examples, from simpler single-legged strategies to more complicated multileg strategies.
It's not just about defining the strategies. With content from options experts, you get real-time options trading ideas. These strategies include the strike prices and expiration dates to use and the scenarios that may lead to profits and areas where you might want to cut losses short to manage a trade.
Check out IBD's new OptionsTrader app for options education, trade ideas and more! Download from the Apple App Store today.
These options trading strategies are explained with articles and videos, which often include step-by-step instructions for entering the trade. Plus, when new strategies are added to the app, users receive alerts.
Automated Options Trading Research
In addition to the human-generated trade strategy ideas, the OptionsTrader app also includes computer-generated strategies from IBD partner QuoteMedia. Here again, trade setups include directional expectations for the underlying equity as well as the strike prices and expiration dates in order to improve your odds of profiting from the trade. Filters allow you to customize strategies for your directional and time-horizon goals with additional data for the highest probability trades according to QuoteMedia.
You'll also find idea generation tools for options trading, including screens based on unusual option activity and open interest. This information isn't just useful for option trading, it can also help inform your stock trading ideas.
To complete your research toolbox, you can enter a ticker symbol and have more technical indicators available. These include IBD Ratings, implied volatility percentile, which options of the security are seeing the most action, expected ranges for different time frames and more. You'll get access to IBD articles so that you can know the fundamental story on the company better. With this data in hand, you can build your own strategies.
Whether just starting out in options trading or having years of experience, the OptionsTrader app is geared toward a data-driven approach to decision making.
More options content is available on our website. Follow Nielsen on Twitter at @IBD_JNielsen.
