How to Trade Options on Fidelity for Beginners
What Exactly Are Options?
Options are contracts that give you the right, but not the obligation, to buy or sell an underlying asset at a specified price before a certain date. There are two types of options:
- Call Options: These give you the right to buy an asset.
- Put Options: These give you the right to sell an asset. In both cases, you’re paying a premium for the contract, which is a small fraction of the stock’s price. If you think a stock’s price will rise, you buy a call option. If you think it’ll fall, you buy a put option. However, keep in mind that options expire and can become worthless if not executed within the specified time frame.
Step-by-Step: How to Start Trading Options on Fidelity
So, you’re ready to dive into options trading on Fidelity. Let’s get you started, but first, you'll need to apply for options trading permissions. Here’s how you do it:
1. Open Your Fidelity Account
If you don’t already have an account, go to Fidelity’s website and sign up. Once registered, make sure you fund your account.
2. Apply for Options Trading Permissions
Fidelity requires you to apply for options trading permissions. You’ll need to navigate to the Options Trading Agreement under the account services section. Choose the level of options trading that fits your experience and risk tolerance:
- Level 1: Basic covered calls and cash-secured puts.
- Level 2: More complex strategies, such as spreads.
- Level 3: Advanced strategies involving naked calls and puts.
Fill out the application and wait for approval, which can take a couple of business days.
3. Research Before You Leap
Before you start making trades, familiarize yourself with Fidelity’s tools. Their “Option Chain” tool will become your best friend. This feature allows you to see different strike prices, expiration dates, and premiums for the asset you want to trade options on. You’ll also want to review stock charts and historical volatility to understand how the asset moves.
Fidelity offers educational resources like articles, webinars, and calculators to help beginners.
4. Placing an Options Trade
Once you’re ready, here’s how you place an actual trade:
- Go to “Trade” at the top of your dashboard.
- Select “Options” from the list of products.
- Enter the ticker symbol for the asset you want to trade (e.g., AAPL for Apple).
- Pick whether you want to buy a call, buy a put, or execute another strategy.
- Choose your strike price (the price at which you can buy or sell the stock) and expiration date (when the option expires).
- Set the number of contracts and then confirm your trade.
Fidelity offers various types of orders, like market orders and limit orders, to help manage your risk and reward.
5. Monitor Your Positions
After placing your trade, don’t just sit back. You’ll need to monitor how the stock price moves relative to your strike price. Fidelity’s Active Trader Pro platform can help you track your options in real-time and offers advanced charting tools to assist in decision-making.
Strategies for Beginners
Now that you know the mechanics of trading options on Fidelity, let’s dive into some basic strategies.
1. Covered Call
This strategy is perfect for beginners and involves selling call options against a stock you already own. You’ll collect a premium for selling the option, and if the stock doesn’t hit the strike price, the option expires, and you keep the stock. This is a great way to generate income while holding long-term stocks.
2. Cash-Secured Put
If you’re considering buying a stock but want to get it at a lower price, selling a put option could be a good move. You’ll receive a premium upfront, and if the stock hits the strike price, you’ll have to buy it. But you’re getting it at a lower price than the market.
3. Vertical Spread
A more advanced strategy but still relatively low risk, vertical spreads involve buying and selling options with the same expiration date but different strike prices. This limits your risk but also caps your potential profit.
Risk Management
Options trading can be lucrative, but it comes with risks. Never trade more than you can afford to lose. Fidelity provides several risk management tools, such as stop-loss orders and limit orders, to help protect your investments. You can also use the Probability Calculator to estimate the likelihood of various outcomes.
Common Mistakes to Avoid
Not Understanding the Greeks: Options traders use "the Greeks" (Delta, Gamma, Theta, Vega) to gauge the sensitivity of an option's price to various factors. Ignoring these metrics can lead to unexpected losses.
Ignoring Expiration Dates: Options have a time limit. Many beginners forget that options expire, often rendering them worthless if not acted on before the expiration date.
Overleveraging: Because options are much cheaper than the underlying stock, it’s tempting to buy too many contracts. Keep your risk in check by only trading what you can afford.
Why Fidelity Is a Great Platform for Beginners
Fidelity’s low fees, robust educational tools, and user-friendly interface make it a great choice for beginners. Here’s a breakdown of some advantages:
| Feature | Description |
|---|---|
| Low Trading Fees | Fidelity charges $0 commissions on stocks and $0.65 per options contract, which is competitive in the market. |
| Educational Resources | Fidelity offers webinars, articles, and even personalized coaching to help you understand the ins and outs of options trading. |
| Mobile Trading App | With the Fidelity app, you can trade options on the go and stay updated with real-time data. |
| Advanced Tools | Fidelity’s Active Trader Pro offers advanced charting and real-time analysis tools for those who want more than just the basics. |
Options trading can be an exciting way to diversify your portfolio. But it’s important to remember that with great reward comes great risk. By using Fidelity’s platform, starting slow with covered calls and cash-secured puts, and learning from your mistakes, you can become a confident options trader in no time.
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