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How To Trade Options

How To Trade Options On Fidelity:

Trading options on Fidelity can be a rewarding experience if approached with the right knowledge and strategy. Whether you are a beginner or a seasoned investor, this detailed guide will walk you through the process of trading options on Fidelity, covering everything from setting up your account to executing trades effectively.

Understanding Options

Options are financial derivatives that allow investors to buy or sell the underlying security at a predetermined price before a specific date. There are two types of options:

  • Call Options: Give the holder the right, but not the obligation, to buy an asset at a specified price within a certain period.
  • Put Options: Give the holder the right, but not the obligation, to sell an asset at a specified price within a certain period.

Benefits of Trading Options

  • Leverage: Options allow investors to control a larger amount of stock with a relatively small investment.
  • Flexibility: Options offer versatile strategies for hedging, speculating, and earning additional income.
  • Risk Management: Options can be used to limit losses, lock in profits, or gain exposure to a market move.

Setting Up Your Fidelity Account for Options Trading

Step 1: Open a Fidelity Brokerage Account

  1. Visit the Fidelity website and click on "Open an Account."
  2. Select the type of brokerage account you wish to open. For options trading, a standard individual or joint brokerage account is suitable.
  3. Complete the application process by providing your personal information and verifying your identity.

Step 2: Enable Options Trading

  1. Log into your Fidelity account.
  2. Navigate to "Accounts & Trade" and select "Account Features."
  3. Under "Options Trading," click "Apply for Options Trading."
  4. Complete the options application, which will assess your trading experience and knowledge.
  5. Submit the application and wait for approval, which may take a few business days.

Step 3: Select Your Trading Platform

Fidelity offers various trading platforms suitable for different levels of expertise, such as:

  • Fidelity.com: Great for beginners with essential trading tools.
  • Fidelity Active Trader Pro: Offers advanced features like real-time data, advanced charting, and customizable layouts.

Executing an Options Trade on Fidelity

Step 1: Research and Analyze the Market

  1. Use Fidelity’s research tools and reports to analyze the stock or index you are interested in.
  2. Observe market trends, news, and technical indicators that might impact the underlying asset's price.

Step 2: Choose an Options Strategy

Based on your market prediction, choose a suitable options strategy:

  • Long Call/Put: Bet on the price moving significantly in one direction.
  • Covered Call: Generate income by selling call options against stocks you own.
  • Protective Put: Hedge against potential losses on your existing stocks.
  • Straddles and Strangles: Bet on high volatility without predicting the direction.

Step 3: Enter an Options Order

  1. Log into your Fidelity account or launch Active Trader Pro.
  2. Select "Trade" from the main menu.
  3. Enter the stock symbol you wish to trade options on.
  4. Choose the option chain that lists available contracts with different expiration dates and strike prices.
  5. Select the desired contract and click "Trade."
  6. Enter the order type (e.g., market, limit) and the number of contracts.
  7. Review your order details and click "Submit Order" to execute.

Monitoring and Managing Your Options Positions

  1. Regularly check your positions through your account dashboard.
  2. Use Fidelity's alerts and notifications to stay informed about price movements or news affecting your investments.
  3. Be prepared to adjust or close positions as market conditions change or as you approach expiration dates.

Common Questions in Options Trading

What Are the Costs of Trading Options on Fidelity?

  • Commissions: Fidelity charges $0.65 per options contract on top of $0 commission for online U.S. stock and ETF trades.
  • Assignment Fees: A $5 fee applies to options exercises and assignments.

What Risks Should I Be Aware Of in Options Trading?

  • Time Decay: Options lose value as expiration approaches, especially if they are out of the money.
  • Volatility: High market volatility can lead to rapid and significant changes in option prices.

Tips for Successful Options Trading on Fidelity

  • Educate Yourself: Continuously learn about options strategies and market conditions.
  • Practice with Paper Trading: Use Fidelity's paper trading feature to practice strategies without risking real money.
  • Stay Disciplined: Set clear goals and adhere to your trading plan to avoid emotional decisions.

Additional Resources

  • Fidelity Learning Center: Offers tutorials, webinars, and articles focused on options trading.
  • Books and Courses: Consider investing in books or online courses by reputable authors and traders.

By thoroughly understanding options strategies, utilizing Fidelity's robust tools, and continually educating yourself, you can effectively navigate the world of options trading. Remember, while options offer a powerful way to enhance returns and manage risks, they require diligence and attentive management to achieve success.