5 Steps to Try Your Hand at Options Trading (Without Getting Burnt)

webull-options-trading
Image: iStock/toondelamour

Beyond just trading regular ol’ stocks and shares, you may have heard of other ways to generate gains quicker, albeit with more risk involved—even if the market seems to be like a yoyo these days.

One of these ways is to trade options, and if you’re already trading your stocks and ETFs via a trading app like Webull, then you can seamlessly trade options there as well!

Just note that options trading is a form of derivative trading. This means, you’re not trading the actual stocks themselves, but you’re instead buying into the speculation of whether the price of an underlying asset (i.e. the stock) will rise or fall. So there is always a chance that if you’re not careful, you could end up losing more money than you’re prepared to.

Thankfully, there are some ways to put out the fire before you get burnt. Here are 5 steps to try your hands at options trading.

 

1. Come up with a solid trading strategy

If you want to get started on options, be sure to read up on what is options trading first. But if you already have an idea of what options trading is and want to try out a different platform like Webull, read on. 

Options essentially are contracts with a set validity and a strike price (the value of the underlying asset that would trigger this contract). The price of buying or selling the option is called the premium. Options can only be traded in the US stock market, so remember to keep the SGD to USD conversion in mind! 

When you buy an option for a stock with a strike price of US$15 with an expiry of say, 2 weeks from now, you can exercise the option within those 2 weeks. Even if the stock is trading at US$16, when you exercise the option, it means you can buy 100 shares at US$15 each, which is cheaper than the market price. Yay.

One common strategy is to earn the premium off trading options, by selling options. However, you must ensure that you are selling covered calls, or selling cash-covered puts. Otherwise, you might make a loss as you will need to pay penalties (if not enough cash) or buy the stock from the open market (at likely a higher price) to fulfil the options contract that you sold should it get exercised. Ouch.

Apart from this, there are actually 11 options trading strategies available. To learn about each, how they are executed and their pros and cons, Webull has a comprehensive options page that talks about these strategies in detail, from single option, covered stock, straddle, butterfly to iron condor.

By the way, if your risk appetite is low, it might not be a good idea to dive immediately into live options trading. So you might try the next step first…

 

2. Demo trade your strategy for 3 months

Online brokerages thankfully have a demo trade mode, so you can test your strategy before actually jumping into the fray. It’s like having a life jacket on while learning how to swim, before you actually go into the deep end by yourself.

Webull has a paper trading mode where you can practise options trading risk-free and without paying any commission fees. You also get unlimited virtual cash (not real money), so it’s the perfect platform for you to hone your strategies. It can be a numbers overload especially for newbies and even for experienced traders, it may be a good chance to familiarise yourself with the platform and test new ideas. 

Webull Paper Trading also comes with all the bells and whistles of the app, such as real-time data so you can access quotes, explore integrated charts with indicators, and set up price alerts, just like in a live market environment. If you’re savvy, there are also over 50 technical indicators and 12 charting tools at your fingertips!

If you’re looking for a sign to start, here’s a promo!

Sign up for an account and trade with Webull, and stand a chance to receive an Apple Watch SE (worth S$382.50), plus S$100 cash.

Sponsored
Webull logo
MoneySmart Exclusive
GIVEAWAY | No commission
Min. Commission Fee for US Stocks
USD0.50*
Min. Commission Fee for SG Stocks
S$0*
Min. Funding
S$0
MoneySmart Exclusive:

[GIVEAWAY | MoneySmart Exclusive]
Get up to S$150 Cash via PayNow exclusively on MoneySmart when you simply sign up and fund/transfer in*! T&Cs apply.

Be the lucky one to walk away with 2 attractive prizes on top of existing cash rewards.
Apple iPhone 15, 128GB (worth S$1,311) when you sign up, transfer-in* to Webull and trade
AND Apple AirPods Pro Gen 2 (worth S$362.35) when you sign up, fund* and trade

Increase your chances of winning when you refer friends today. T&Cs apply.

[Webull Promotion]
Enjoy 0 commission fee* up to 3 years with SG Stock Trading and FREE market data when you open a Webull account.

Plus, get up to USD3,000 NVDA shares* from Webull's Welcome Promotion. T&Cs apply.

Get up to USD10,000 NVDA shares* from Webull's Transfer-In Rewards Promotion. T&Cs apply.

Valid until 24 Apr 2024

Promo ends on 31 Aug 2023 16:00 SGT. You need to make initial deposit of SGD300 or more to receive the welcome rewards.

 

3. Trade live with a broker with low fees to maximise your gains

Now that you’re comfortable with the theory of trading options, it’s time to switch to the real thing. As always, fees always eat into gains, so it makes sense to pick an online broker that offers one of the lowest options trading fees, such as Webull.

Webull was again awarded Best Broker for Low-Cost Options Trading by Investopedia this year. According to the popular finance website, Webull was chosen as it is “a broker that levies no (direct) costs on its users while still providing very capable trading and analytical features”.

Trading options on Webull incurs US$0 platform fees^, US$0.55 per options contract as commission fees, US$0 assignment or exercise fees and no minimum deposit. Relevant regulatory and exchange fees may still apply.

^Terms and conditions apply.

Options traders on Webull also get complimentary real-time Options Price Reporting Authority (OPRA) data for one month after opening an Options trading account. They also get complimentary Cboe Global Indices Feed (CGIF) data thanks to the partnership between Webull and Cboe.

 

4. Optimise your strategy

Once you’re more familiar with the process of trading options, it’s time to widen your… options. Webull has an Options Screener where options can be screened by market, indicators, pattern, days to expire and other conditions. It’s useful when you are looking for more variety to add to your portfolio, or if a certain stock is down or a particular industry isn’t doing too well.

To use the Webull Options Screener, you’ll need to be subscribed to OPRA quotes (it’s complimentary, as mentioned above) and your app must be updated to the latest version. For example, if you want to trade options every week, you might set the expiration type to weekly. To see how volatile an option could be, you can also filter by “Last Price” and even “Change%”. Advanced traders may also want to look into the “Greeks and Probability Analysis”, where they can consider options to trade based on their Theta values, for example.

You can also set Options alerts to enable the real-time monitoring of option prices and related indicators, to get notifications and reminders to keep you on top of your options trading game! 

For example, you may want to close off an option quickly if the price is in your favour, before any sudden market movements in the future. Sometimes, making a small loss on the options premium could offset the overall money you’d need to pay if your option is assigned (that’s 100 stocks at the strike price, versus the premium, which could be anywhere from US$5 to US$100).

 

5. Grow your idle funds

So what do you do with all your gains from trading options? One way is to channel them into Webull’s regular savings plan, which has no fees* and is hassle-free. This basically means you automatically and regularly put a fixed sum of money into this plan, which uses dollar-cost averaging (DCA) to grow your funds.

You get a diversified portfolio where you can choose your favourite US stocks, ETFs and mutual funds. Barriers to entry are also low – you can start as low as US$5. The best thing is that you can enter at your own pace, and set the frequency from every trading day, weekly, bi-weekly or monthly.

You just need to decide on the amount, the frequency and when to start. This will put the regular savings plan into motion, and thanks to the DCA method, you don’t need to be emotionally invested and worry about volatility (in the long run, it will average out the rise and fall of the market).

*Terms and conditions apply

 

Found this article interesting? Share it with your friends and family!

 


This post was written in collaboration with Webull. While we are financially compensated by them, we nonetheless strive to maintain our editorial integrity and review products with the same objective lens. We are committed to providing the best information in order for you to make personal financial decisions with confidence. You can view our Editorial Guidelines here.