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What does a beginner need to know to start trading options?

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Quick Answer

Beginners looking to trade options should know about permissions from brokers, leveraging a security and how to view the option chain, reports James Highland for the Houston Chronicle. Options can protect against decline in price of the underlying security and offer the capability to potentially buy a security at a lower price than the market, according to the Nasdaq website.

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Full Answer

Most brokerages require a specific permission to begin trading options. This permission is known as a Level 2 option trading level, notes Highland. Options allow investors to fix the price for a specific period, thus giving the opportunity to leverage investment power and increase potential rewards, explains Nasdaq. Options also have a defined risk, as a buyer cannot lose more than the price paid for the option.

After receiving permission from a broker, an investor must identify an option associated with a security, such as a stock or stock market index, states Highland. Option types include calls or puts, says Nasdaq. A call option is the right for a buyer to purchase a stock, while a put option is the right to sell the underlying security at a particular price. Beginners must also consider the option chain, which is a group of options that all have unique expiration dates and prices, reports Highland.

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