Options trading systems are as different as the traders that use them. The main idea behind using an options trading software or system is to find the trade that is the most likely to make you money. While each one has its own way of determining which options have the most potential, many have a lot of similarities. First, good software solutions will usually have some sort of analytical component included.

Good options investors know that the key to finding a good options trade is to analyze. Software systems make it possible to analyze thousands of potential trades in a much shorter time than attempting to do this manually and have a lesser chance of making a mistake. Analysis software can also suggest trading strategies that might be more successful than others for particular trade situations. Options screeners are one way to find good trade opportunities.

Options pricing tools are also often included in trading software or systems. This software is designed to determine an option’s fair market value and compare that against its current selling price. In many cases, this software will also have the capability of assessing changes to the option’s value vs. price under many different market conditions as well as determining the return on investment for the underlying security. Option valuation software can help you monitor the movement and volatility of options’ prices and accounting software will help you monitor your gains vs. losses.

Buying a stock and selling calls at a strike price above the price at which you purchased your stock or the current stock price. This is commonly regarded as the safest of the options trading strategies. If one is taking a position in a stock for the long term, selling options is a way to make some income supported by that stock position.  In exchange for that the premium received, the upside of gains to the stock are limited.

Objective:

- Risk minimization

- Income

Example:

You are own 100 shares of Apple stock that cost you $350 a share. You sell one
options call contract with a strike price of $400 and expiry 3 months out and
collect a premium of 17.50 a share. When expiry comes around, the stock price
of the underlying is $370. You keep the premium. In total, you have gained
17.50 from the premium plus another $30 per share from appreciation in the
stock price. Your gains on the stock would have been capped to $50 had the
underlying appreciated above $400.

Naked Calls

In contrast to covered calls, naked calls involve selling puts or calls with
holding the underlying stock. Naked calls are much riskier than covered calls
as your losses could theoretically be unlimited. Naked options selling are an
advanced strategy and one that is not recommended for new traders.

The Covered Call- This is a very common trading strategy used by options traders every day. The concept is pretty simple: Buy stock and sell it for more than you paid. Here’s how it works:
You, the investor, purchases 100 shares of a stock that you know will either maintain its value or increase. You should also be comfortable with selling it. Next, pick a selling price, also known as a strike price that is a few dollars over its current value or what you paid for it, but not too far out of reach that the stock couldn’t rise that high in the next 60-90 days. Lastly, choose an expiration date and premium price. Ideally your expiration date will be in the next 60-90 days in order to realize your profits as soon as possible. The premium price is the price you will be selling your option for. Ideally, this price will be around 2% of the total value of the contract. This strategy can have several outcomes, but regardless of the market shift, you will make money.

• If the stock decreases in value, the purchaser will allow the option to expire and while your stock is worth less, you still have it PLUS the premium paid by the investor to purchase your call.
• If the stock increases, you will realize the profits from the stock sale PLUS the premium paid to purchase your option.

The Protective Put-This is also a common trading strategy that allows investors to protect themselves against losses. Here’s how it works:

You own 100 shares of stock in Company XYZ that is currently worth $10 per share and are afraid the company is losing market share and value. You purchase a put option that allows him to sell his shares at $9 per share for up to 90 days as an insurance policy against additional loss. After 60 days, the value of the stock plummets to $4 per share, so you exercise your protective put option and place your shares on the market for $9 per share, limiting your loss to only $1 per share or $100 instead of $6 per share, or $600.

In order to trade options effectively, you will need to understand some basic terms before you get started.
• American Style-An option that can be exercised at any time until the expiration date
• At the money- An option where the underlying investment has reached the strike price.
• Buy-Write Transaction- The purchase of 100 shares of stock and the sale of one call option at once
• Call option-A contract that allows the holder to purchase a security at a specified price for a specified time
• Cash settled-An option where the settlement occurs in cash. No securities exchange hands
• European Style-An option that can only be exercised on the expiration date, not before
• Exercise-The process of exchanging an option contract for the underlying security
• Exercise Notice- The means whereby the option seller is notified that the buyer has exercised his or her option
• Expiration-The date whereby an option is no longer valid
• Expire worthless-Is what happens to an option that remains out of the money at expiration and is not exercised.
• Extrinsic value- The difference between an option’s intrinsic value and its premium price
• Hedge-An investment made to protect the value of another investment
• In the Money- A call option who’s underlying security has increased beyond the strike price or put option who’s underlying security has decreased beyond the strike price
• Intrinsic Value- The difference between a the strike price of an in the money option and the value of the underlying security.
• LEAPS-an acronym for Long Term Equity AnticiPation Series. These are long term options that can remain active for up to three years.
• Leg-One part of a spread position
• Margin-The amount of money that must be deposited in an account to protect the broker from loss
• Obligations- Forced attributes upon the seller of an option
• Option-A contract that grants a right, but not an obligation, to an investor to purchase a security at a predetermined price for a predetermined time.
• Out of the Money- A call option who’s underlying security has not reached the strike price yet or a put option who’s underlying security has not decreased in value to the strike price.
• Premium- The price of an option on the open market
• Put Option-A contract giving the right to an investor to sell securities at a predetermined price for a predetermined time.
• Rights-Attributes given to the owner of an option
• Straddle-An option spread that encompasses an at the money call and an at the money put at the same time with the same expiration date.
• Strike Price- The price at which the underlying investment is exchanged if the option is exercised
• Theoretical Value- The value of an option based on assumptions and mathematical calculations
• Time Decay-The tendency of time value to decrease as the option moves closer to expiration. This is expressed by Theta
• Time Value- The option’s value as it relates to the amount of time left until expiration.
• Underlying-The asset in which an option derives its value
• Volatility- The level of price movement within the market

Trading options is risky and should not be traded by inexperienced traders. The main reason is because the risks are non-linear in nature and depends on a variety of factors beyond the value of the underlying security. Reducing the amount of risk you take on when trading options stem losses, but also stifles your ability to realize large gains. For example, take a look at covered calls versus naked calls.

A covered call is a call option where the seller owns enough of the stock to sell to the buyer in the event the buyer exercises his option to buy. The seller of the call can make money in this situation; however, by owning the underlying security, the profits realized on the option trade are reduced by the amount of money spent to initially acquire the securities. A naked call, however, means that an investor sells a call without owning enough (or any) of the underlying security to sell to the buyer in the event he or she exercises his option to do so. This means that the investor will have to purchase the underlying security at current market price and then sell it to the call holder, potentially at a huge loss. The main benefit to writing a naked call is that the seller can realize  gains if the market moves favorably, since he can collect the premium on the call without ever having to outlay money for the security itself. However, this is an extremely risky move since market volatility can easily move against the investor.

However, trading options can be considerably less risky than trading stocks. When trading stocks, investors must lay out a considerable amount of cash to own the security and hope that the stock’s value moves upward in value. Every dollar the stock moves downward is a loss to the investment. With options, investors can take advantage of just about any market condition and risk much less cash to control the same number of shares. Options traders can even make money if the value of the stock remains stagnant, something a stock traders simply can’t do.

Investor A has been watching the S&P 500 all day and has seen an upward trend in value. To take advantage of this, he purchases a call binary option, speculating that the upward trend will continue. The current market value is 1105 and he locates a binary option with this as the strike price that expires in three hours that offers a 60% payout at expiry if the value is greater than 1105. However, if the value of the market is lower at expiry, he will lose his entire investment.

Investors are able to invest any amount of money they like in binary options, though there may be some stipulations set by the brokerage firms themselves. For illustration purposes, Investor A has invested $100 in this call.

At the end of three hours, the market has moved to 1107. Investor A has been successful in this trade, since the market was indeed valued higher after three hours and has realized a profit of $60 ($100*60%=$60). Had the market closed below 1105, however, the investor would not only have not profited, but would have lost his initial investment as well.

After you have grasped the theoretical basics, the best method for learning the ins and outs of options trading is to get hands on experience. Unfortunately, this is not a practical approach as you stand to lose a lot of money, unless your brokerage offers a virtual trading platform. Virtual trading allows you access to all the same tools and information as a live trading platform without the risk to your actual cash. You can review market trends, set up trades and exercise options, all in real time. You can instantly see the results of your trade and whether or not your strategy was effective using real data. Using a virtual trading platform in conjunction with educational articles, webinars and other educational materials will allow you to visual concepts and understand how different strategies work in relationship with current market conditions.

Before you trade, it is advisable to have clear objectives and strategies. If you trade without these,  you are really just gambling.How can you be sure that your strategy is profitable? To test it, you can either do back testing in using a system with with a history of trades. This is beyond many new traders and even experienced ones. The most practical way is to test your strategy with a good sample of of small Trades. Keep the size of your trades small and at this stage. A statistical number of trades is 30 to 50. Once you have tested your strategy and found that it makes a profit over a good sample of trades, you then know that you have and edge.