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How to Buy Options

Buying options on Fidelity can seem like a daunting task if you're new to investing, but with the right guidance, you'll find it to be an efficient and rewarding process. Options trading offers investors the flexibility to hedge against potential market moves, generate income, or speculate on price changes. Fidelity, known for its comprehensive trading platform and tools, provides an excellent environment for options trading. This guide will walk you through the necessary steps to buy options on Fidelity, ensuring you understand the process clearly and thoroughly.

What Are Options?

Before diving into the process of purchasing options, it's crucial to have a basic understanding of what options are. Options are a type of derivative financial instrument that derives their value from an underlying asset, such as a stock. An option gives you the right, but not the obligation, to buy or sell the underlying asset at a specified price on or before a certain date.

There are two primary types of options:

Call Options: These give the holder the right to buy the underlying asset.
Put Options: These give the holder the right to sell the underlying asset.

Options are used for a variety of investment strategies, including hedging existing investments, generating additional income, or speculating on stock price movements.

Setting Up for Options Trading on Fidelity

Account Requirements

To trade options on Fidelity, you must first have a brokerage account with them. If you don't already have one, you need to open a Fidelity account. The process is straightforward and can be completed online. Here’s how:

Visit Fidelity's Website: Go to Fidelity's home page and find the option to open a new account.
Choose the Account Type: Select the type of brokerage account you desire (individual, joint, retirement accounts, etc.).
Provide Personal Information: Fill in your personal details, such as your name, address, and Social Security number.
Complete Verification: Fidelity will verify your identity and information provided.
Fund Your Account: Transfer funds into your Fidelity brokerage account to start investing.

Option Trading Approval

Once your account is set up, you need approval for options trading. Fidelity requires you to apply for an options trading agreement. Here's how you can do this:

Access Option Application: Log in to your Fidelity account and navigate to "Account Features."
Complete Application: Fill out the options application, which includes questions about your investment experience, financial situation, and familiarity with options risk and strategies.
Select Trading Levels: Fidelity offers different levels of trading (ranging from 1 to 5) that dictate the types of options strategies you can employ. Level 1 includes basic options strategies like covered calls, while higher levels (2–5) involve more complex strategies.
Approval Process: Submit your application. Fidelity will review it and notify you of your approved trading level.

Buying Options on Fidelity

Step-by-Step Guide

Once your account is approved for options trading, follow these steps to buy options on Fidelity:

Log In: Access your Fidelity account online or through the mobile app.
Navigate to Trade: On the main navigation, find the "Trade" option and select it.
Select Options Trading: Choose "options" from the trading menu to begin your options transaction.
Enter Trade Details:
- Select Security: Enter the ticker symbol of the underlying asset you're interested in.
- Choose Option Type: Indicate whether you wish to buy a call or a put option.
- Expiration Date: Select the option's expiration date from the available list.
- Strike Price: Choose a strike price, which is the price at which you want to buy or sell the underlying asset.
Specify Order Details:
- Order Type: Choose between a market order (executes at current market price) or a limit order (specifies the maximum price you are willing to pay).
- Contracts: Indicate how many contracts you want to buy (each contract typically represents 100 shares of the underlying stock).
Review & Submit: Double-check all details of your order and click "Submit" to place your trade.

Monitoring and Managing Options

After purchasing an option, it’s important to actively monitor its performance and be aware of key dates like the expiration date. Fidelity provides tools and resources to track your investments:

Positions Page: View all your current holdings, including options, under the "Positions" tab.
Performance Tracking: Utilize Fidelity’s tools to track the performance of your options and make necessary adjustments.
Alerts and Notifications: Set up alerts for price changes or nearing expiration dates.

Risk Considerations and Strategies

Options trading comes with inherent risks. Understanding these risks can help you make informed decisions and manage your investments effectively:

Time Decay: Known as theta, this is the rate at which an option loses its value as it approaches its expiration date.
Volatility: Significant price movements can impact options’ pricing significantly.
Out-of-the-Money Expirations: If an option expires out-of-the-money (i.e., call option's stock price is below strike price, or put option's price is above strike price), it will expire worthless.

Common Options Strategies

Here are common strategies that investors might use while trading options:

Covered Calls: Selling call options on stocks you already own to generate additional income.
Protective Puts: Purchasing puts to protect an existing stock position from a drastic price decline.
Straddles and Strangles: Buying calls and puts simultaneously to capitalize on expected volatility without direction preference.

FAQ About Options Trading on Fidelity

What are the costs associated with options trading on Fidelity? Fidelity charges $0.65 per options contract traded. Be sure to review all fees associated with trading options to fully understand the costs involved.

Can I practice options trading on Fidelity? Yes, Fidelity offers a paper trading platform where you can simulate options trading strategies without financial risk. This is an excellent tool for beginners to learn and test strategies.

How do I know what level of options trading to apply for? Base your decision on your investment goals and experience. Beginners might start at Level 1, while experienced traders might apply for higher levels to engage in more complex strategies.