Options 101

Note: Want to skip the guide and go straight to the free templates? No problem - scroll to the bottom.
Also note: This is not legal advice.

Introduction

Options have become a go-to for companies, investors and traders around the world, offering them a range of advantages from hedging against unfavorable market movements to increasing leverage and taking calculated risks. With the ability to control larger positions in stocks, commodities, indexes or currencies without large upfront investments, it’s no wonder they’ve become an essential part of the financial landscape.

At Genie AI we understand how powerful options can be; as well as managing risk associated with investing in the stock market and increasing returns by taking calculated risks, they can also be used to employ a range of trading strategies. Buying calls to capitalize on a price increase or selling puts to benefit from a decrease are just two such examples – enabling investors and traders to maximize profits while minimizing losses.

Options also offer opportunities for portfolio diversification with limited capital; instead of putting up large amounts of money upfront, investors and traders can take advantage of price movements without being out of pocket. And last but not least: They provide an alternative for owning shares in companies altogether; options enable you to benefit from price changes without having commit large sums initially.

Our team at Genie AI are passionate about helping people better understand the myriad possibilities that options bring - that’s why we provide access to our open source legal template library which has millions of datapoints showing what market-standard options look like. So if you’re looking for step-by-step guidance or wish to access our template library today then read on; there’s no need for a Genie account! We simply want you make use of our expertise so that you can get ahead in your investments/trading - whatever your goals may be.

Definitions (feel free to skip)

Strike Price: The predetermined price at which the option buyer has the right to buy or sell the underlying asset.
Expiration Date: The date on which the option contract expires and the option buyer no longer has the right to buy or sell the underlying asset.
Premium: The amount of money that the option buyer pays for the option contract.
Option Expiration Cycle: The pattern of expiration dates for options contracts.
In-the-Money: A situation in which the option buyer has the right to buy or sell the underlying asset at a price that is lower than the market price.
Out-of-the-Money: A situation in which the option buyer has the right to buy or sell the underlying asset at a price that is higher than the market price.
At-the-Money: A situation in which the option buyer has the right to buy or sell the underlying asset at the same price as the market price.
Intrinsic Value: The difference between the option buyer’s right to buy or sell the underlying asset and the current market price of the asset.
Time Value: The amount of money that the option buyer pays for the option contract, minus the intrinsic value of the option.

Contents

• Research options trading
• What are options?
• Benefits and risks of options trading
• Types of options and their features
• Key terms and concepts related to options trading
• Develop an options trading strategy
• Strategies for trading options
• Time frames for options trading
• Risk management strategies for options trading
• Find an options broker
• How to choose an options broker
• Compare fees, commissions, and features of different brokers
• Open an options trading account
• Gather necessary documents for account opening
• Submit account opening documents to the broker
• Fund the account
• Practice trading options
• Paper trading
• Use a demo account
• Execute an options trade
• Enter the order
• Monitor the order
• Close out the order
• Monitor your trades
• Develop a trade tracking system
• Analyze the performance of your trades
• Review your options trading
• Review performance
• Adjust strategies and tactics
• Resources for options traders
• Online resources
• Books
• Videos
• Practice risk management
• Set stop-loss and take-profit orders
• Monitor your risk-reward ratio

Get started

Research options trading

• Read articles and/or books about options trading
• Watch videos about options trading
• Use online resources to learn more about options trading
• Ask an experienced options trader or broker for advice
• When you feel comfortable with the basics of options trading and have a good understanding of the terms and concepts, you can check this step off your list and move on to the next step.

What are options?

• Understand the basics of what options are, including the concepts of a call option and a put option
• Learn how options can be used as a form of derivative in an investment portfolio, and how options can be used to hedge against risk
• Find out about the different types of options, such as American and European options
• Know the key terms associated with options, such as strike price, expiration date and time to expiration

When you can check this off your list:

• When you have a thorough understanding of what options are and how they can be used in an investment portfolio.

Benefits and risks of options trading

• Understand the benefits of trading options: diversification, leverage, potential to earn income, and potential to limit losses
• Understand the risks of trading options: more complex than trading stocks, increased risk of loss, costs associated with trading options
• Learn how to manage the risk of trading options by understanding market trends, portfolio management, and using stop-loss orders
• Be aware of the tax implications of trading options
• Research and practice in a simulated environment to become more familiar with option trading

When you can check this off your list and move on to the next step:

• When you understand the benefits and risks of trading options and have learned to manage the risk of trading options.

Types of options and their features

• Understand the two main types of options: calls and puts
• Know the expiration date, strike price and underlying assets of an option
• Familiarize yourself with the different types of option strategies (covered call, married put, etc.)
• Understand the differences between American and European options
• Be aware of the different option pricing models (Black-Scholes, binomial tree, etc.)

Once you have a solid understanding of the types of options and their features, you can check this step off your list and move on to the next step.

Key terms and concepts related to options trading

• Understand the basic concepts related to options trading:
• Call option: the right to buy an asset at a certain price
• Put option: the right to sell an asset at a certain price
• Strike price: the price at which an option contract can be exercised
• Exercise: the process of executing a transaction based on the terms of an option contract
• Expiry date: the date on which an option contract expires
• Learn how to interpret an options chain, which is a list of all the available options and their features
• Familiarize yourself with the different order types used in options trading, such as limit orders, market orders, stop orders, and trailing stop orders
• Understand the different option strategies available, such as covered calls, bull calls, bear puts, and straddles
• Learn the risks involved in options trading

You will know when you can check this off your list and move on to the next step when you have a firm understanding of the key terms and concepts related to options trading, are able to interpret an options chain, have a basic understanding of the order types used in options trading, and have an understanding of the different option strategies and the risks involved.

Develop an options trading strategy

• Learn the basics of option trading and the three primary strategies: buying a call, writing a call, and buying a put
• Decide which strategy to use based on your risk tolerance, financial goals, and investment objectives
• Research the options available to you and select the ones that will give you the potential for the greatest return
• Monitor the market and adjust your strategy accordingly
• When you have a trading plan in place and understand the financial risks associated with each strategy, you can move on to the next step.

Strategies for trading options

• Understand the different types of options strategies, such as buying/selling calls and puts, writing covered calls/puts, and using straddles, spreads, and combinations
• Learn how to evaluate the potential risks and rewards of each strategy and choose the ones that are best suited to your goals
• Practice the strategies in a simulated trading environment
• When you feel comfortable, begin trading in a live environment
• Monitor and adjust your strategies as needed

You will know you have completed this step when you feel comfortable with the different types of options strategies and can choose the ones that are best suited for your goals.

Time frames for options trading

• Understand the different time frames available for options trading: intraday, overnight, and weekly
• Learn how to adjust strategies to fit the desired time frame
• Get familiar with the most commonly used indicators for each time frame
• Learn the best entry and exit points for each time frame
• Understand the different risk level associated with each time frame
• Be able to identify when it’s best to use each time frame
• When you are comfortable with the different time frames and the best strategies to use in each, you can check this step off your list and move on to the next step.

Risk management strategies for options trading

• Understand the risk/reward ratio of different strategies: Before you enter into an options trade, you need to have an idea of what the potential reward and risk is. This will help you identify if the strategy is worth pursuing.
• Set realistic profit targets: Establish a goal for your trades, and know when to exit them before they become too risky.
• Manage your risk with stop-loss orders: Stop-loss orders are a form of risk management that helps you limit your losses by setting predetermined prices at which to close out your trades.
• Utilize diversification: Proper diversification across different types of options strategies can help reduce your overall risk.

Checklist for completion of this step:

• Understand the risk/reward ratio of different strategies
• Set realistic profit targets
• Set stop-loss orders
• Utilize diversification

Find an options broker

• Research reputable options brokers, looking for fees, features, and customer service
• Check for regulation and safety of customers’ funds
• Compare brokers to find the one that best suits your needs
• When you’ve found the right broker, open an account and deposit funds
• Verify your account to complete the setup process
• Once all of this is done, you can move on to the next step of choosing an options broker

How to choose an options broker

• Research and read reviews of the options brokers available
• Evaluate the broker’s credibility and trustworthiness
• Compare fees, commissions, and features of different brokers
• Check if the broker offers the option types and markets you need
• Determine the customer service, account minimums, and other requirements
• When you find a broker that has the needed features and fits your needs, create an account to get started
• Once you have an account created, you can check this step off your list and move on to the next step

Compare fees, commissions, and features of different brokers

• Research different options brokers to compare the fees, commissions, and features they offer.
• Make sure to read the fine print of any broker you’re considering to make sure they offer the features you need.
• Compare the fees and commissions to make sure you’re getting the best deal.
• Once you have selected a broker, you can check this step off your list and move on to the next step.

Open an options trading account

• Research and select a broker that offers options trading
• Visit the broker’s website to open an account
• Enter your personal information such as name, address, phone number, etc.
• Provide proof of identity, such as a driver’s license, passport, or other government-issued ID
• Provide proof of residency, such as a utility bill or bank statement
• Agree to the broker’s terms and conditions
• Fund the account with the amount you are comfortable investing
• Once the account has been successfully opened, you can move on to the next step of gathering necessary documents for account opening.

Gather necessary documents for account opening

• Gather the following documents: proof of identity, a utility bill, a signed agreement, and proof of address.
• Collect and review all the documents that the brokerage firm has requested, and double-check that they are all correct.
• Make sure that all documents are dated within the last three months or less.
• Once all documents have been gathered and reviewed, you can move on to the next step.

Submit account opening documents to the broker

• Gather all documents needed for account opening such as a copy of your driver’s license or passport, a copy of a utility bill, and a voided check
• Submit the documents to the broker via their website, email, fax, or mail
• Check the broker’s website or contact customer service to confirm they have received your documents
• Once your documents have been successfully processed and approved, you can move on to the next step of funding your account.

Fund the account

• Determine the amount of capital to be deposited into the account
• Choose a payment method (credit card, bank transfer, etc.)
• Follow the broker’s instructions to make the deposit
• Verify the funds have been credited to the account
• You will know this step is completed when the broker confirms the funds have been received and the account reflects the new balance.

Practice trading options

• Research and find an options broker that best fits your needs and finances
• Open an account and fund it with the amount you are willing to invest in options trading
• Familiarize yourself with the order types and options trading lingo
• Practice setting up trades and managing positions with a paper trading account
• Once you feel comfortable with the basics, start trading with small amounts of real money
• Monitor your trades and positions to observe how the market is affecting your investments
• When you feel comfortable enough to trade on your own, you can move on to the next step.

Paper trading

• Research the different types of options and their associated risks
• Test out strategies using paper trading to see how they perform in different market conditions
• Monitor the performance of your paper trades and adjust your strategies accordingly
• Once you feel comfortable with your paper trades and the associated risks, you can move on to the next step.

Use a demo account

• Sign up for a demo account with an online broker
• Practice setting up an options trade, including entering the symbol, quantity, price, and type of order
• Test out different strategies, such as buying calls and puts
• Get familiar with the platform’s features and functions
• Once you feel comfortable executing an options trade, you can check this step off your list and move on to the next step of executing an actual options trade.

Execute an options trade

• Choose the type of options trade (call or put)
• Select the underlying asset, such as a stock or an ETF
• Enter the number of contracts to buy or sell
• Choose the expiration date
• Enter the strike price
• Review the order details
• Submit the order
• Monitor the trade until the expiration date

Once the order is executed, you can check it off your list and move on to the next step.

Enter the order

• Decide on the type of order you want to place (market, limit, etc.)
• Select the option you want to buy or sell
• Enter the quantity of contracts you want to buy or sell
• Choose the price you’d like to buy or sell at
• Enter the order in your broker’s trading platform
• Check your order confirmation to make sure everything is accurate
• You will know you have completed this step when you have received your order confirmation.

Monitor the order

• Observe the order for any changes in price, time, quantity, etc.
• Monitor the order until it is either filled, partially filled, or canceled.
• Make sure to check for any updates from the exchange, broker, or other sources.
• Check that the order is still valid and active.
• You can check this step off your list after the order is filled or canceled.

Close out the order

• Decide whether to leave your order open or close it out by submitting a closing order
• If you decide to close out the order, enter a closing order in the same manner as the opening order
• Monitor the order until it is filled or canceled
• Once the order is filled or canceled, you can move on to the next step or close out the session

Monitor your trades

• Set up a system to record each trade and its details, such as the date, price, quantity, and type
• Track the performance of each trade, including any changes in price and profit/loss
• Review each trade periodically and make any changes to your strategy that may be necessary
• Check in with your trades daily to make sure they are performing as expected
• When you are satisfied with the results of your trades, you can move on to the next step in the guide.

Develop a trade tracking system

• Create a spreadsheet or tracking document to record trade details
• Input your trade entry and exit prices, as well as the number of shares traded
• Record the date of your trades and any other pertinent information such as fees and commissions
• Use the tracking document to analyze trends in your trading performance
• Update the document on a regular basis with your new trades
• Once you have completed this step, you will have developed a system to track your trading performance.

Analyze the performance of your trades

• Review all of your completed trades, and analyze their performance.
• Analyze the financial performance of each trade, and identify any mistakes you may have made.
• Evaluate any losses you may have incurred, and consider how you could have avoided them.
• Assess the risk associated with each trade, and determine if it was an appropriate level of risk for the potential reward.
• When you have completed your analysis, review your findings and make any necessary changes to your trading strategies.
• You will know that you can move on to the next step when you have thoroughly reviewed your trades and identified areas for improvement.

Review your options trading

• Review your options trading by looking at the performance of each trade
• Analyze the risk/reward ratio of each trade
• Look at what strategies you used when trading options
• Compare your results with the market averages
• Determine if you need to adjust your trading strategies
• Check if you need to make any changes to your risk management techniques
• When you are done with reviewing, you will have a better understanding of how successful your options trading is, and where you may need to make improvements.

Review performance

• Analyze your past performance in detail to identify potential areas of improvement
• Analyze the data to determine which option strategies were the most successful and which were the least successful
• Review the performance of any adjustments made to the strategies over time
• Compare the performance of different option strategies and tactics to assess which ones are working best
• Make adjustments to strategies and tactics accordingly based on the performance review
• Take notes of any successes or failures so that you can better improve your future performance
• Once you have completed your performance review and made any necessary adjustments, you can move on to the next step.

Adjust strategies and tactics

• Identify areas where strategies and tactics need to be adjusted
• Research potential adjustments
• Make adjustments to existing strategies and tactics
• Monitor performance of strategies and tactics to ensure they are meeting objectives
• Repeat process as needed

Once you have identified and made adjustments to strategies and tactics, you can check this off your list and move on to the next step.

Resources for options traders

• Research and read up on options trading
• Make sure to understand the risks and rewards associated with options trading
• Familiarize yourself with the different types of options and strategies
• Take advantage of online resources, such as online stock trading platforms, online brokerages, and options trading forums
• Once you feel comfortable and confident with your understanding of options trading, you can move on to the next step.

Online resources

• Research online options trading websites
• Find online options trading forums
• Look for online options trading courses
• Read online reviews of options trading brokers
• Identify online options trading tools and resources

Once you have researched online options trading websites, options trading forums, courses, brokers, tools and resources, you can check this off your list and move on to the next step.

Books

• Read books on options trading to become familiar with the language and concepts
• Look for books that explain the basics of options trading, provide detailed examples, and offer strategies
• Research different authors and books to find those that best fit your learning style and needs
• Once you feel comfortable with the terminology and concepts of options trading, you can move on to the next step.

Videos

• Watch a few introductory videos on options trading to get a general overview of the topic.
• Look up some reviews of different options trading tutorials to find the right one for you.
• Invest time in watching and absorbing the content of the tutorial.
• Utilize practice accounts to test the strategies and concepts learned from the videos.

When you can check this off your list and move on to the next step:

• When you feel comfortable with the basics of options trading and are ready to implement your strategies.

Practice risk management

• Understand the basic principles of risk management, such as diversification, leverage, and position sizing
• Research different strategies to determine which one best suits your risk appetite
• Use a risk management calculator to assess the potential gains and losses of a given position
• Set realistic limits on how much you are willing to lose on each trade
• Take the time to understand the potential risks associated with each type of option before investing

Once you have a better understanding of risk management principles and have implemented risk management strategies, you can check this step off your list and move on to the next step.

Set stop-loss and take-profit orders

• Determine the amount of risk you are willing to take on each trade
• Set a stop-loss order to minimize losses and protect capital
• Estimate the potential reward of the trade and set a take-profit order
• Set the order entry and make sure it is consistent with your risk-reward ratio
• Monitor the trade and adjust the stop-loss and take-profit orders as needed
• When you reach your desired risk-reward ratio, you can move on to the next step of monitoring your risk-reward ratio.

Monitor your risk-reward ratio

• Understand the risk-reward ratio and how it is calculated
• Monitor your positions regularly to ensure that the ratio is in line with your expectations
• Calculate the risk-reward ratio for each of your positions and adjust as needed
• Keep a record of your risk-reward ratios and adjust as the market conditions change
• When you have achieved a risk-reward ratio that is acceptable to you, you can check this off your list and move on to the next step.

FAQ:

Example dispute

Lawsuits Referencing Options:

• The plaintiff must have a valid claim that they have been wronged in some way by the defendant due to a breach of contract, negligence, or other legal issues.
• The claim must show that the plaintiff has suffered a financial loss due to the defendant’s actions or inactions.
• The plaintiff must prove the defendant had a duty to act in a certain way and failed to do so.
• The plaintiff must show that the defendant’s actions (or inactions) caused the financial loss.
• The plaintiff must be able to demonstrate that the defendant had knowledge of the option and their obligations concerning it.
• The plaintiff must demonstrate that the defendant breached their duties in some way, such as not exercising an option when they should have done so, or exercising an option when they shouldn’t have done so.
• The plaintiff must be able to prove damages, if any. This includes any costs, harm to reputation, lost profits, etc.
• The plaintiff must be able to demonstrate that the damages were a direct result of the defendant’s actions (or inactions).
• The plaintiff must be able to prove that they are entitled to receive compensation for the damages.
• The plaintiff must be able to demonstrate that the defendant was aware of their obligations and failed to comply with them.
• The plaintiff must be able to prove that the defendant was in breach of their duties and that the breach caused the financial losses.
• The plaintiff must be able to prove that they are entitled to receive compensation for the losses.

Templates available (free to use)

Anti Steering Loan Options Disclosure
Emi Options Post Meeting Advice Letter
Employee Share Options Stamp Duty Rules
Exercise Notice For Phantom Options Ltip
Exit Only Emi Options Letter From Adviser To Qualifying Client
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Market Value Or Nominal Cost Options Award Certificate Long Term Incentive Plans
Market Value Or Nominal Cost Options Exercise Notice Long Term Incentive Plans
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Multiple Resolutions With Different Voting Options Written Resolution Of Members
Nil Cost Options Award Certificate Long Term Incentive Plans
Nil Cost Options Exercise Notice Long Term Incentive Plans
Non Qualifying Options Grant Under Emi Time And Or Performance Based Vesting Plan
Non Tax Advantaged Share Options Agreement For Contractors Advisors
Options Grant Under Emi Time And Or Performance Based Vesting Plan
Paragraphs Covering Adoption Of And Invitations To Save As You Earn Options Plan And Sip For Board Minutes
Phantom Options Award Certificate Long Term Incentive Plans
Summary Of Material Modifications Smm Describing Covid 19 Benefits Options Including Telehealth
Time And Performance Based Employee Share Options Grant Board Minutes

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