- Find a comprehensive source of options information.
- Explore the options chain, utilize tools, and learn different strategies.
- Practice before trying the real thing.
Buying and selling options is more complex than buying and selling stocks.
So, you'll want to have access to top research and tools to create, test, and ultimately implement your strategies.
3 Ways To Setup A 70% Probability Of Success Options Trade
Fortunately, there are easily accessible tools and resources on Fidelity.com to help you hone your options research skills.
For knowledgeable investors who are willing to accept the risks of trading options, here is a 5-step guide to researching options.
1. Find a comprehensive source of options information
Just as a carpenter needs tools, options investors need information, ideally all in one place.
Enter Fidelity.com's options hub, where you can find powerful options research and a platform to place trades. Among the features you'll find there are:
Get to know the options chain
The options chain is where the rubber meets the road. This is where all options contracts for a particular stock or index are listed. Vital information, such as the type of options available (calls and puts), strike price, expiration date, greeks (defined later in this article), and more, is found in the options chain.
It's worth spending a little time getting used to what an options chain looks like so that you can better navigate it when the time comes to make a real trade (see the graphic below).
An options chain for the iShares Core S&P 500 ETF.
Source: Fidelity.com, as of June 20, 2016.
Image is for illustrative purposes only.
The options chain differentiates between calls (left side in the graphic above) and puts (right side), and identifies the cost of the various options (bid-ask spreads highlighted in yellow), as well as the expiration date (e.g., July 15, 2016), and the strike price (middle column highlighted in rose).
You can find an options chain on Fidelity.com by going to the options research page, selecting "Quotes and Tools", then Option Chain and enter a ticker symbol for a stock or index.
Utilize options statistics and tools
Much as fundamental business metrics—such as earnings, revenues, and costs—can help when analyzing stocks, there are several important statistics that are commonly used to analyze options. They include:
Additionally, there are powerful tools that can help you analyze and select among the different options contracts, such as:
- Greeks: These are mathematical calculations designed to help traders assess risk by measuring the impact of changes in price, time, volatility, and other factors on options prices.
- Probability calculator: Determining the right strike prices and expiration dates is critical to success in the options market.
With a probability calculator, you can analyze the likelihood of the underlying stock trading at or between your price targets by a specified date, based on historical volatility.
- Profit/loss calculator: This tool can help you model how changes to the underlying price, dividends, interest, and volatility can affect the profitability of your strategy.
Learn about different strategies
Once you've become accustomed to the type of information you can discover about options, the intricacies of the options chain, and the various tools available to analyze options, you might benefit from learning about combinations of options that can be constructed in order to potentially take advantage of your market outlook.
In addition to simply buying and selling options, there are a number of different options strategies that you can employ, depending on your expectation for the market or for a particular stock or index.
For example, in volatile markets you might consider a straddle or strangle strategy.
Or, if you wanted to generate income on a stock you own and have a neutral outlook on, there's the covered call strategy.
You can find these strategies, and many more, on Fidelity.com in our options strategy guide.
Practice your trades
Given that trading options is relatively more complex than buying and selling stocks, it may be prudent to try a few practices trades before doing the real thing.
Best of all, you can test your own strategies, develop your own methods to research options, and possibly find yourself more prepared to make a real options trade.