How To Practice Trading Options Without Risking Money?

What is options trading and what are its features?

Options trading explained

Options trading is a form of derivative trading, which means it’s a type of financial contract where the value is derived from an underlying asset or group of assets. In options trading, traders are given the right, but are not obliged, to buy or sell an underlying asset at a pre-set price (known as the strike price, or exercise price), within a specified time frame, before the expiry date. Though an option trades like a standard instrument, it’s basically a contract between two investors or traders that helps them speculate on the price of an asset, without either of them actually owning the asset.

An options trading scenario

Let’s imagine an example in the world of options trading using the story of two traders: Meta Bull and Meta Bear. Meta Bull is optimistic about the future value of Meta stock (NASDAQ: META) but doesn't want to purchase the shares directly. Enter Meta Bear, who holds the opposite view, that Meta is overvalued and will decrease in value.

They strike a deal where Meta Bull pays a premium to Meta Bear for the right to buy Meta stock at a predetermined price ($320) three months later. If, at that time, Meta stock is at $350, Meta Bull profits $30 by buying at the agreed $320. However, if the stock drops to $290, Meta Bull can opt not to trade at $320, and Meta Bear keeps the premium, regardless of the outcome.

Meta Bull, in this case, is the option buyer, having acquired a “call option”, which grants the right to purchase shares at a set price. The seller, Meta Bear, is obliged to fulfill the agreement if Meta Bull decides to buy. Conversely, a bearish trader expecting a decline would go for a “put option”, giving them the right to sell at the predetermined price, while pocketing the premium.

Options Trading Features

Traders looking to engage in options trading would look at an “options board”, also known as an options chain, which is a comprehensive tool showing option prices for a particular asset. Displayed in table format, the options board presents available options contracts, including call and put options, with various strike prices and expiration dates, which is the date and time that the option will close. The board usually also shows bid and ask prices, expected volatility, and any information needed in order to hash out an effective trading strategy.

As you can see, options trading is incredibly complex, and traders engaging in it do so at their own risk. Luckily, demo accounts exist, so that you can get familiar with how it works, practice different strategies, and understand which ones work for your trading style, without having to risk your own capital.

Best brokers for free options trading

Options and stock trading demo accounts provide traders with a valuable tool that simulates a real market environment and market conditions, allowing them to practice their trading strategies without ever having to spend any actual money. Many brokerage firms give individuals access to virtual platforms that let them engage in simulated options trading, so they can experiment with different trading techniques and approaches, but without the risk incurred by using real money.

When you sign up for a demo account, you are provided with a sum of “virtual money”, which you can use to place trades. The prices of virtual assets you invest in will mimic those of real-world assets, so you can get a real feel for which options strategies work for you, how different market scenarios impact your trades, and familiarize yourself with decision making and risk management. Demo options accounts are a (literally) priceless tool for educating yourself and refining your skills in options trading.

Not all demo account platforms are the same, however. Their features differ, as do the lengths of their trial periods, as well as the amounts of virtual funds you receive.

Is options trading difficult?

With the financial market being so competitive, trading options can often be seen as complicated, particularly for beginner traders. However, with enough studying and learning, and thorough practice, options trading can become more manageable.

Options trading is seen as difficult for several reasons. For a start, typical strategies are more complex than usual, often requiring a combination of call options and put options to effectively manage risk. Options are also time sensitive, adding a layer of complexity that wouldn’t be found in regular stock trading. At a more advanced level, options trading incorporates mathematical models (such as the Black-Scholes model) to determine the fair price of an option, which can be intimidating for those not comfortable with quantitative concepts.

Beginners can follow some basic tips to simplify options trading and better prepare themselves:

• Study. Invest time in learning the basics. Many online resources, courses, and books explain options in beginner-friendly terms

• Start Small. Begin with simple strategies and gradually progress. Avoid complex trades when first starting off

• Manage Risk. Understand and implement risk management strategies to protect your capital, whether virtual or real

• Use a Demo Account. Practice, practice, practice! Use a demo options trading account and put your strategies to the test. Experiment as much as you can, and study while you do so

At the end of the day, you have nothing to lose by creating a demo account and practicing trading options with it. The road to successful options trading is not an easy one, but with the right attitude, self-discipline, and commitment, you could become an options maestro.

Best Forex brokers

1

9.4/10

Go to broker

eToro is a multi-asset investment platform. The value of your investments may go up or down. Your capital is at risk. Don’t invest unless you’re prepared to lose all the money you invest.

Minimum deposit:

$50, $100 (for UK clients)

Bonus for deposit:

0%

Regulation:

CySEC, FCA, ASIC

Review

The eToro broker was founded in 2007. The company promotes itself as a social trading platform working with traders from over 140 countries. The broker has several divisions operating under different jurisdictions and licensed by different regulators. For example, eToro (Europe) is licensed by the Cypriot regulator CySEC (109/10) and eToro (UK) is licensed by the British regulator FCA (583263). The broker also has a representative office in Australia and the USA. eToro Profile Details

Pros/Cons

•the minimum transaction amount for copying is $1;

•handy functionality for passive investing;

•regulated by independent monitors;

•it is possible to purchase contracts for fractional shares (that is, to invest amounts less than the cost of one share);

•it is possible to buy shares at once (not CFDs) on the US stock exchanges.

•high spreads;

•periodic technical failures in order execution;

•lack of the most popular platforms such as MetaTrader 4 and MetaTrader 5 in Europe and the CIS;

•no access to ECN systems, orders are processed only according to the STP (straight-through processing) scheme with access to specific liquidity providers;

•there is a commission for withdrawing funds;

•impolite support staff;

•inconvenient website.

Study Review

2

9.2/10

Go to broker

Your capital is at risk.

Minimum deposit:

No minimum

Bonus for deposit:

0%

Regulation:

FSC (BVI), ASIC, IIROC, FCA, CFTC, NFA

Review

The name OANDA is an acronym for “Olsen & Associates” or “Olsen AND Associates”. It is registered in the United States and provides its clients with a wide range of financial services in most countries of the world. The company was founded in 1996 and is currently regulated in four jurisdictions. The main regulator of the broker is the UK Financial Conduct Authority (FCA). Oanda Canada is licensed by IIROC. The company has several significant awards to its credit, including a victory in the category "Best Forex Trading Technologies" from the UK Forex Awards, "Best Trading Platform" from FX Week, as well as "Best Customer Service" from the US Foreign Exchange Report.

Pros/Cons

•Minimum deposit from 1 dollar.

•A large selection of the most popular trading instruments.

•Several reliable and reputable financial regulators.

•Inconvenient and poorly functioning site.

•Lack of cent accounts.

•Lack of bonus programs.

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