Getting Started in Options Trading
M I Trading School recommends that for you to start trading options, you will need to have a trading account with your brokerage firm that allows and is approved to trade options. Once you have setup your account, you can then place options trades through your brokerage account.
(In my experience, most brokerage firms will require you to have a margin account in order to trade options).
Opening a Trading Account
When opening a trading account with a brokerage firm, you will be asked whether you wish to open a cash account or a margin account.
Cash Account vs. Margin Account
The difference between a cash account and a margin account is that a margin account allows you to use your existing holdings (eg. stocks or long-term options) as collateral to borrow funds from the brokerage to finance additional purchases. With cash accounts, you can only use the available cash in your account to pay for all your stock and options trades.
There is always a minimum deposit required to open a trading account. The amount required depends on the type of account that you are opening as well as the brokerage firm. Little or no deposit is required to open a cash account while federal regulations require a deposit of at least $2000 to open a margin-enabled account.
Online Brokerage vs. Offline Brokerage
To trade options effectively, M I Trading School finds it necessary to trade via an online brokerage account as there are simply too many variables in a typical options trade, as compared to a stock trade. Aside from the possibility of miscommunication when placing an order through your broker over the phone there are also unnecessary increased fees and time delays. Having to communicate too many details on one trade to your broker over the phone is just to high risk however, should you need help placing your first order, most brokers are happy to walk you through your first order without charging you any additional fees. If that is not the case you may have selected the wrong brokerage firm IMO.
With technology so advanced these days, online brokerages for options now offer highly intuitive user interfaces where it is far easier to place option trades online than having to do it over the phone. Moreover, while a human broker can only handle one client at a time, online brokerages can handle thousands of orders simultaneously. Thus, it is no coincidence that the rise of option trading also coincide with the rapid advancement of internet technologies.
When opening an options brokerage account you may want to research several brokerage firms as you will find it time well spent evaluating the quality of service each brokerage firms offers. Full service or traditional brokerages provide a wide range of services at extra charges.
Conversely, I have found that my discount brokerage firm only offers the standard limited amount of options. For example the strike prices are set at $1, $2, $3, $4, $5, $10, $15, $20 and so on. This service works fine for me as I only use options to play higher priced stocks that I am unwilling to purchase large amount of shares. An example would be Apple, Inc. The risk reward on a stock priced that high is just not worth it. To purchase the share outright I would have to much capital at risk for the small amount of gain I would experience in a short time span, so I would then opt to place an options on that stock, if I thought the stock price was going to more significantly. (This is for example only and I have never place an option on Apple's stock nor am I advising you to do so)