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Options Traders - Definition
Capital Market participants who buy and sell options as their primary investment activity.
Options Traders - Introduction
Options traders are simply people who trade options; Stock Options, Options on Futures, Forex Options and all forms of exotic options. Options traders may also trade in the underlying asset itself but does so as part of an overall options strategy. As long as you buy and sell options for profits, you are an options trader. However, there are also different types of options traders in the market.
This tutorial shall discuss what options traders are, the different kinds of options traders and the options trading strategies pursued by each kind.
Who Are Options Traders?
Basically, anyone that trades options can be regarded as an options trader. There are now options for almost everything that can be traded from stock options to forex options and even options on futures. As such, most savvy traders would have traded options as part of their overall portfolio some time in their trading career no matter what instrument they trade in primarily.
However, a true options trader is one who trades options primarily and occassionally combines the underlying as part of an overall options strategy. Options traders have existed for as long as modern options exchanges have existed on the banks of the Chicago River. Options traders back then discovered the power of leverage in trading the options on commodities instead of the actual commodities themselves and became the very first modern options traders in the history of options trading.
Broadly, options traders can be classified as either professional or retail. Professional options traders can then be broadly classified as institutional options traders or non-institutional options traders. Institutional options traders are big financial companies that performs highly specialized options trading. Market makers are one such kind of options traders. All options traders, professional or retail, could become either an options day trader, options swing trader, scalper or options position trader depending on the main options strategy pursued.
Types of Options Traders
Even though anyone who trades options can be regarded as an options trader, options traders can actually be classified into different types depending on whether they are professionals and according to the specific strategy that is being pursued no matter what the underlying asset is.
Professional Options Traders
Professional options traders are anyone who trades options for a living full time. Professional options traders can take two forms; Institutional Options traders and Non-institutional Options Traders. Institutional options traders are financial companies that either manage a derivatives based fund or performs specific functions in the options exchange. An example of such institutional options traders are Market Makers who are commonly options position traders. Non-institutional professional options traders are individuals who trade options full time for a living. These individuals may specialise in one or more options trading methodologies.
Retail Options Traders
Retail options traders are non-professional part time options traders who forms a large part of the options market. These non-professional options traders pursue almost the full range of options trading strategies and may change strategies from time to time and trades in order to supplement their current full time income.
Options Day Traders
Options Day Traders are options traders who buy and sell options intraday, using options for leverage on sharp and quick intraday movements. These are the kind of options traders who are glued to the computer watching every minute of the market in order to spot good entry and exit points. Even though the percentage gains made by these options traders are small on a daily basis but it all adds up to significant amounts on a monthly basis and can be extremely profitable for experienced options traders.
Options Swing Traders
Options Swing Traders are options traders who trades a short term price swing in the underlying asset using options primarily for leverage. These are the kind of options traders who buy options and hold them for a few days or even weeks. Options swing trading is suitable for most retail options traders due to the low time committment and relatively lower complexity.
Options Position Traders
Options Position Traders are options traders who trade complex and calculated options combinations in order to profit from things such as volatility and time decay. Almost all professional options traders are position traders who trade positions that limit their risk and optimise their risk reward profile. Options positions can be created by combining options or options with the underlying asset itself.
Read more about the different Options Trading Styles.
How To Be An Options Trader
To become a retail options trader, all you have to do is follow the following steps:
1. Decide on your time commitment and inclinations. Based on your time commitment and inclinations, you can then decide whether to specialise in options day trading, swing trading or positions trading.
2. Study, Study, Study. There are many options strategies to pursue no matter which style of options trader you decide to become. Extensive study and paper trading of your selected options strategy is necessary before committing any real money. In fact, this study and paper trading phase needs to be done for every new options strategy you decide to try. The guidance of an experienced options mentor is necessary as well. You could begin your study of options trading from our Options Trading Basics Tutorial.
3. Open a trading account. Only when you have fully understood and paper traded your chosen options strategy should you open a real funded trading account. You might already have an unfunded options trading account opened for the purpose of paper trading practise and should only fund it when you are ready for real money trading. Here's a list of Options Brokers.
4. Progressive Real Money Trading. Trading with real money can be very different from paper trading in terms of emotional pressure. Such emotional pressures usually lead to losses. As such, you should start real trading by trading only 1 contract at a time in order to minimize losses from such mistakes and then gradually increase fund size with increased experience.
Issues Concerning Options Traders
Here are some issues concerning options traders.
Even though there is an options market in almost every capital market around the world, the US options market remains the biggest and most liquid options market in the world. In fact, the US Chicago Board of Exchange (CBOE) remains the biggest options exchange in the world. Some popular options exchanges around the world include the NSE / BSE options market of India and the Eurex of Europe.
How Do We Trade Options In The US Market?
Almost anyone from around the world can trade options in the US market from the comfort of their homes simply by opening an online options trading account through a US based online options broker that accepts accounts from your country. Get a list of US options brokers that accepts foreign accounts.
Options Traders Tax Issue
Capital gains from options trading is taxable in the USA. Basically, profits arising from buying and selling call options or put options are to be reported as short term gains or long term gains depending on the holding period. If you are not trading from the USA, you might be taxed either in USA or your own country depending on the arrangement between your country and the USA. Please consult your local tax adviser for specifics.