It's fantastic that you're looking to delve into options trading on ETRADE! It's a powerful way to potentially enhance your portfolio, offering flexibility, leverage, and even income generation. However, it's crucial to understand that options also involve significant risks and are not suitable for all investors. This comprehensive guide will walk you through the process step-by-step, helping you navigate ETRADE's platform and make informed decisions.
Let's get started on your options trading journey!
How to Buy Options on E*TRADE: Your Step-by-Step Guide
Step 1: Are You Ready for Options Trading? (Engage!)
Before we even think about clicking "buy," let's be honest with ourselves. Options trading isn't like buying a share of a blue-chip stock. It's more complex, involves specific strategies, and can lead to rapid gains or losses.
Do you understand the basics of options? Do you know what a "call" option is versus a "put" option? What about "strike price" and "expiration date"? If these terms are new to you, I highly recommend spending time on E*TRADE's extensive educational resources or platforms like Investopedia to build a solid foundation. Seriously, don't skip this part!
What's your risk tolerance? Options can be volatile. Are you comfortable with the possibility of losing your entire investment in a short period?
Do you have a clear financial objective? Are you looking to generate income, hedge existing positions, or speculate on market direction? Your objective will dictate the strategies you employ.
If you're feeling a bit overwhelmed, don't worry! E*TRADE offers excellent educational tools, including webinars and articles, to help you get up to speed. They even have a paper trading feature (more on that later!) so you can practice without risking real money.
Step 2: Open and Get Approved for an E*TRADE Account
If you don't already have one, your first practical step is to open an E*TRADE brokerage account.
2.1 Opening Your Account
Visit the E*TRADE Website: Go to etrade.com and look for the "Open an Account" button.
Choose Your Account Type: For options trading, you'll generally need a brokerage account. You can also trade options within certain retirement accounts, but brokerage accounts offer more flexibility for advanced strategies.
Complete the Application: You'll be asked for personal information, financial details, and your investment objectives. Be honest and accurate.
2.2 Applying for Options Trading Approval
This is a crucial step! E*TRADE, like all brokers, requires you to apply for options trading privileges. They do this to ensure you understand the risks involved.
The Application Process: Once your account is open, you'll typically find an option to "Apply for Options Trading" or similar within your account settings or through the trading platform.
Financial Information and Experience: You'll be asked about your:
Investment Objectives: Growth, income, speculation, capital preservation, etc.
Trading Experience: How long have you traded stocks, mutual funds, or options? What's your general investing knowledge?
Financial Situation: This includes your annual income, liquid net worth, and total net worth. This information helps E*TRADE assess your ability to bear potential losses.
Understanding Approval Levels: E*TRADE has different levels of options approval, generally ranging from Level 1 (basic strategies like covered calls) to Level 4 (more complex strategies like naked options, which carry unlimited risk). The level you're approved for will depend on your stated experience and financial situation.
Level 1: Typically for covered calls and cash-secured puts.
Level 2: May include buying calls and puts, and potentially some basic spreads.
Level 3 & 4: Allow for more advanced and higher-risk strategies, often requiring a margin account and significant capital.
The "Characteristics and Risks of Standardized Options" Disclosure: You must read and acknowledge this document from the Options Clearing Corporation (OCC). It's dense, but it outlines the potential risks and characteristics of options contracts. Don't just click through it!
Approval can take a few business days. Be patient, and if you're denied, you can usually reapply after gaining more experience or if your financial situation changes.
Step 3: Funding Your E*TRADE Account
You'll need funds in your account to buy options. E*TRADE offers several ways to deposit money:
Electronic Funds Transfer (EFT): Link your bank account for easy transfers. This is usually the most common method.
Wire Transfer: For faster, larger transfers, but often with associated fees from your bank.
Check Deposit: Mail a check or use mobile check deposit (if available and within limits).
Account Transfer (ACATS): Transfer an existing brokerage account from another firm.
Step 4: Research and Identify Opportunities
This is where the real work begins. Blindly buying options is a recipe for disaster. E*TRADE offers powerful tools to help you identify potential trades.
4.1 Utilizing E*TRADE's Research Tools
Power E*TRADE Platform: This is E*TRADE's flagship platform for active traders, and it's particularly robust for options. Familiarize yourself with its features.
Streaming Quotes & News: Stay up-to-date on market movements and company-specific news.
Advanced Charting: Use technical indicators and drawing tools to analyze price trends.
Screeners: Filter for stocks that meet your specific criteria (e.g., strong earnings, high volume).
Earnings Move Analyzer: Helps you gauge expected price moves around earnings announcements.
Fundamental Analysis: Research the underlying company.
Financial Statements: Look at revenue, earnings, and debt.
Industry Outlook: How is the sector performing?
News and Events: Upcoming product launches, regulatory changes, etc., can significantly impact stock prices.
Technical Analysis: Study price charts and indicators to identify potential entry and exit points.
Support and Resistance: Price levels where the stock tends to bounce or stop.
Moving Averages: Smoothed price data to identify trends.
Volume: Helps confirm the strength of price movements.
4.2 Developing Your Trading Strategy
Based on your research, formulate a clear plan.
Market Outlook: Do you believe the underlying stock will go up (bullish), down (bearish), or stay within a range (neutral)?
Time Horizon: How long do you expect the price movement to occur? This influences the expiration date you choose for your options.
Risk vs. Reward: Define your maximum acceptable loss and your profit target before you enter a trade. This is crucial for disciplined trading.
Specific Option Strategy:
Buying Calls (Long Calls): If you expect the stock price to rise significantly.
Buying Puts (Long Puts): If you expect the stock price to fall significantly.
Spreads (e.g., Vertical Spreads, Iron Condors): More advanced strategies that involve buying and selling multiple options contracts to define risk and reward within a range. These require higher approval levels.
Step 5: Navigate to the Options Chain and Place Your Order
Once you have a clear idea of what you want to trade, it's time to execute.
5.1 Accessing the Options Chain
Search for the Underlying Asset: On the E*TRADE platform, type the ticker symbol of the stock or ETF you want to trade options on (e.g., AAPL for Apple).
Locate the "Options" Tab/Link: This will take you to the options chain for that underlying asset.
5.2 Understanding the Options Chain
The options chain is a table that displays all available options contracts for a given security. It can look intimidating at first, but let's break down the key elements:
Expiration Dates: Options are listed by their expiration dates (weekly, monthly, LEAPS). Choose an expiration date that aligns with your time horizon.
Strike Prices: These are the predetermined prices at which the underlying asset can be bought or sold.
Call Options (Left Side):
Bid: The highest price a buyer is willing to pay for the option.
Ask: The lowest price a seller is willing to accept for the option.
Last Price: The price of the most recent trade.
Volume: Number of contracts traded for that specific option.
Open Interest: Number of outstanding contracts for that specific option.
Put Options (Right Side): Similar data points as call options.
"Greeks": For more advanced traders, you'll see columns for Delta, Gamma, Theta, and Vega. These measure an option's sensitivity to various factors.
5.3 Building Your Order
Select Your Option: Click on the "Ask" price of the specific call or put option you want to buy. This will typically pre-populate the order ticket.
Order Ticket Details:
Action: Buy to Open (since you're initiating a new long position).
Quantity: Number of options contracts (each contract typically represents 100 shares of the underlying stock).
Order Type:
Market Order: Executes immediately at the best available price. Not recommended for options due to potential price slippage, especially for less liquid options.
Limit Order: You specify the maximum price you're willing to pay. Highly recommended for options to control your entry price.
Stop Order: Becomes a market order when a trigger price is hit.
Stop-Limit Order: Becomes a limit order when a trigger price is hit.
Time in Force:
Day: The order is active only for the current trading day.
Good 'Til Canceled (GTC): The order remains active until filled or canceled (typically 60 days on E*TRADE).
Review Your Order: Double-check everything – the ticker symbol, option type (call/put), expiration date, strike price, quantity, and order type.
Preview Order: E*TRADE will show you an order preview with estimated costs and potential commissions (typically $0.65 per contract, or $0.50 if you make 30+ trades per quarter).
Place Order: If everything looks correct and you understand the risks, click "Place Order."
Step 6: Monitor Your Position and Plan Your Exit
Buying an option is only half the battle. Successful options trading requires diligent monitoring and a predefined exit strategy.
6.1 Monitoring Your Position
Portfolio View: Your E*TRADE portfolio will show your options positions, their current value, and unrealized gains/losses.
Real-Time Data: Utilize E*TRADE's streaming quotes to stay updated on the underlying stock and your option's price.
News Alerts: Set up alerts for news related to your underlying asset.
Technical Indicators: Continue to monitor charts for signs of trend changes or significant price movements.
6.2 Creating an Exit Plan
Profit Target: Define at what price or profit percentage you will sell to lock in gains.
Stop-Loss: Determine your maximum acceptable loss and set a mental or actual stop-loss order to limit potential downside.
Time Decay (Theta): Remember that options lose value as they approach expiration, even if the underlying stock price doesn't move. Be aware of how time decay impacts your position.
Closing Your Position: To close a long options position, you'll generally place a Sell to Close order for the same contract you initially bought.
Step 7: Adjust or Close Your Position
Market conditions are constantly changing. Be prepared to adjust your strategy or exit your position.
Adjusting Positions: For more complex strategies, you might "roll" an option (close an existing option and open a new one with a different strike or expiration) or add/remove legs from a spread.
Closing Early: You don't have to hold an option until expiration. Many traders close positions early to take profits or cut losses.
Expiration: If you hold a long call option that is "in the money" (stock price above the strike price) at expiration, it will typically be automatically exercised, meaning you'll buy 100 shares of the underlying stock per contract. If it's a long put option and "in the money" (stock price below the strike price), it will be automatically exercised, meaning you'll sell 100 shares. If the option expires "out of the money," it will expire worthless, and you'll lose the premium you paid. Understand the implications of assignment and exercise!
10 Related FAQ Questions
How to open an E*TRADE account for options trading?
To open an E*TRADE account for options trading, visit their website, select "Open an Account," choose a brokerage account, and then complete the application. After your account is open, you'll need to apply for options trading approval by answering questions about your financial situation and trading experience.
How to get approved for options trading on E*TRADE?
You get approved for options trading on ETRADE by submitting an application that details your investment objectives, trading experience, and financial net worth. ETRADE reviews this information to determine your eligibility and the options trading level you qualify for.
How to understand E*TRADE's options approval levels?
E*TRADE's options approval levels typically range from Level 1 (for basic strategies like covered calls) to Level 4 (for advanced, higher-risk strategies like naked options). Each level allows for progressively more complex strategies, with higher levels requiring more experience and capital.
How to find options contracts on the E*TRADE platform?
On the E*TRADE platform, search for the ticker symbol of the underlying stock or ETF. Once on the security's page, look for an "Options" tab or link which will display the options chain, listing all available call and put contracts by expiration date and strike price.
How to interpret the E*TRADE options chain?
The E*TRADE options chain displays expiration dates, strike prices, and key data for both call and put options, including bid, ask, last price, volume, and open interest. Call options are usually on the left, puts on the right.
How to place a limit order for options on E*TRADE?
To place a limit order for options on E*TRADE, select the desired option contract, and in the order ticket, choose "Limit" as the order type. Then, enter the specific price you're willing to pay per contract. This helps control your entry price.
How to calculate potential profit and loss for an option trade on E*TRADE?
While ETRADE's Power ETRADE platform offers tools like "Snapshot Analysis" to help, generally, for a long call, your maximum loss is the premium paid, and profit is unlimited above the strike plus premium. For a long put, your maximum loss is the premium paid, and profit is limited down to zero for the underlying stock price below the strike minus premium.
How to practice options trading on E*TRADE without real money?
ETRADE offers a "Paper Trading" feature on its Power ETRADE platform. This simulated trading environment allows you to practice options strategies with virtual money and real-time market data, without any financial risk.
How to close an options position on E*TRADE?
To close a long options position on E*TRADE, navigate to your portfolio, find the open options position, and select "Sell to Close" (or "Buy to Close" for a short position). This will pre-populate an order ticket for the same contract you hold.
How to contact E*TRADE customer service for options trading questions?
You can contact E*TRADE customer service for options trading questions by calling their general customer service line (often found on their website's "Contact Us" page, usually 800-387-2331). They also have dedicated options specialists.
