Find out about options trading firms and which one is right for you.
Options trading firms are companies comprised of brokers who assist customers in the purchase of stock options. According to Investopedia, options trading may be one of the least understood forms of investment, but because of its high returns, it is quickly growing in popularity. While options trading can be a very risky investment, it can also be very rewarding.
There is also some level of conceptual stability in options trading, according to Forbes.com, because it gives individuals the option of buying or selling a stock when it reaches a certain limit or low limit rather than obligating them to do so.
An option is essentially a contract between a buyer and a seller that allows the buyer the right to purchase or sell an asset at a specific price during an allocated time. This asset might be in a number of forms including property, stocks, bonds, currency or groups of assets. According to www.riskglossary.com, the contract between the buyer and seller gives the seller the right to buy or sell, but not the obligation, which is what makes options trading so risky—they can choose to hang on to the asset in the hopes that it might increase in value.
Two primary types of stock trading options are available: calls and puts. A call option gives a buyer the option to purchase at a specified price, and a put option allows a buyer the right to sell at a specified price. The strike price of a call or put option is the price value at which the option will go into effect. For example, with a call option, the strike price is the point at which the option may or may not be purchased.
Most options have an expiration date, at which time the option is over. When an action takes place—a purchase or sale—it is called an exercise. Two types of options exist: an American exercise and a European exercise. An American option may be exercised any time prior to the expiration date while a European option may only be exercised on the actual expiration date. A rarely used Bermuda option may be exercised on select dates prior to the expiration date.
Options trading firms benefit customers in several ways. The Web site www.optionsXpress.com explains that convenience is one of the greatest benefits of using an options trading firm. This Web site also advises customers to look for an options trading firm with brokers who are intuitive and knowledgeable enough to anticipate what will happen next in a market.
Options brokers should have easy access to trading account information, analysis tools, stock and option quotes. They should have these common analysis tools: expiration calendars, calculators that can determine return rate and probability of stock reaching desired price, programs to make graphs and tables and databases to assist in trading. The optionsXpress Web site recommends choosing a broker who has educational materials on hand that clients may use to learn more about options. Options trading firms should also allow customers to access information via the firm's Web site.
Reputable options trading firms should be registered with regulatory bodies such as the Financial Industry Regulatory Authority (FINRA) and the Chicago Board Options Exchange (CBOE). They should also be insured. The optionsXpress Web site recommends that individuals inquire as to what will happen to their accounts if the firm goes under.
Options trading firms should offer customers computer hardware that is reliable and safe. Its trading systems should be periodically tested and the firm should have a backup for its Internet connection.
Those interested in an options trading firm should also consider cost when making a selection. A firm's rates should be clear and easy to interpret. If an options trading firm will potentially cost more than potential gains, one must reevaluate using that service. The optionsXpress Web site charges customers about $12.95 per trade or $1.25 per contract. Essentially, anyone interested in options trading firms should evaluate all options and costs prior to making a final decision.
The Web site TradersLog.com features a listing of many popular trading firms for options, futures, equities and more. Trade Wall Street Financial and TD Ameritrade both feature the ability to manage options investments online and feature interactions with brokers for a low price.