Learning how to trade stock options is one of the hot topics circling in the day trading world due to their leverage. If you desire to know how to buy an option, this article will provide the steps to purchase options using TD Ameritrades’ thinkorswim platform.
There are many trading platforms available where you can trade options. However, in our experience, thinkorswim has been one of the leading trading tools today that can handle all of our trading needs.
If you are not a thinkorswim user, we will add additional articles for other trading platforms. Please be aware that thinkorswim is free to use, and you are always welcome to download it and begin trading.
Options Basics
Before purchasing your first option contract, it is essential to familiarize yourself with the basics of options which will help you understand the purchasing process more easily. Please check out Options Trading 101 if you need a refresher on options basics.
Options Trading Levels
You also need to ensure that you have privileges to trade stock options within your brokerage account. Most brokers must grant options trading approval to buy and sell them. Since options can be riskier investments than stock equities, brokers require traders to apply to trade them.
With TD Ameritrade, there are multiple levels of options privileges. See these levels below. To buy single call and put options, you only need to have level 2 access. This access is the only level needed by most option traders when they start.
- Level 1 – Cash Secured Puts & Covered Calls
- Level 2 – Option buying
- Level 3 – Spreads
- Level 4 – Naked Calls & Puts
You have the choice to trade options using advanced strategies like spreads and naked calls and puts. These levels can be requested later if required.
If you are unsure if you have access to trade options, you can always check your account to verify the level of access before applying.
Now, let’s walk through two examples of how to buy options using thinkOrSwim. The first example will use the “Trade” tab in thinkorswim. The second tab involves using Active Trader. Please that these steps apply to both paper trading and live trading.
How to Buy An Option Using the Trade Tab
Traders who do not actively submit trades several times a day may use the Trader tab to enter option trades.
1. Login to thinkorswim.
2. Once thinkorswim is available, navigate to the ‘Trade Tab.’
3. Provide the ticker symbol that you are interested in trading. Remember that stock options are a derivative of a stock, and they are based on the underlying stock price. Thus, we need to start with the underlying asset.
4. Expand the Option Chain related to the underlying asset (stock).
5. On the left side of the Options Chain are the ‘Call’ options, and on the right side are the ‘Put’ Options. You will also notice that the options are categorized by expiration date.
6. Scroll to the expiration date that you desire. Expand the options for this expiration date.
7. The options are listed based on the strike price under the expiration date. The strike price is in the middle of the screen.
8. You will see additional columns (Delta, DTE, etc.) in the Options Chain that you can feel free to customize later. Your specific columns may look different than the columns that we have listed. You will also notice some highlighting. The purple highlighting represents ITM options – In The Money vs. OTM – Out of the Money. If you need further details on ITM vs. OTM, check out this article.
9. Select either the call or put option for the strike price that you want by double-clicking on the ‘Ask’ current price when buying an option. Double-click on the ‘Bid’ current price when selling an option. In the example below, we buy a call option.
- From this section, you can update the following. For now, let’s choose a limit order and set the specified price we want to pay. Also, note that a limit price of 1.00 will represent 1.00 x 100 x the number of contracts selected, which will be the out-of-pocket cost. One option represents 100 shares.
- the quantity
- the type of order (limit, stop market, etc.)
- the limit price
- the Buy or Sell indication
12. Once you have made your selections, select ‘Confirm and Send’.
13. An order confirmation screen appears to confirm your details. Ensure that the window indicates that this is a Buy to Open order for buying an option.
Ensure your strike price and expiration date are accurate. If setting a limit order, ensure that the price indicated is correct. Then, select the ‘Send’ button.
14. Your order has been placed, and the system will notify you once the order is filled. You will then be able to monitor your option position.
How to Buy An Option using Active Trader
Traders who actively trade throughout the day may find it more helpful to use ActiveTrader to enter option trades within thinkorswim. It is easier and allows transactions to be entered automatically without additional screens that can make getting filled much quicker. Check out this video HERE for additional help on using Active Trader to purchase options.
1. Log in to thinkorswim.
2. Once thinkorswim is available, navigate to the ‘Chart Tab.’
3. If you do not have a workspace setup that includes an Active Trader section. Then you will need to add one. Grab the MK workspaceHERE that contains the Active Trader section. In the image below, Active Trader is in the top right quadrant on the screen.
4. From the Active Trader (AT) section, select the down arrow. Select Options in the tab.
5. Provide the ticker symbol you are interested in trading (for example, ‘SPY’).
6. Select Options in the tab.
7. On the left side of the Options Chain are the ‘Call’ options, and on the right side are the ‘Put’ Options. You will also notice that the options are categorized by expiration date. You can also select the number of strikes that you want to see for each expiration date.
8. Scroll to the expiration date that you desire. Expand the tab to see the dates the option expires.
9. Select either the call or put option for the strike price that you want by double-clicking on the option code or the price.
10. This option will now appear in your Active Trader window.
11. Now that your option is available in Active Trader, you can update the quantity and set whether you want to buy with a market or limit order.
12. To buy the options contract, move your mouse to the green highlighted section next to the current market price. Click in the green area.
13. If ‘Auto-Send’ is not enabled, you will receive a confirmation screen similar to the below screen.
14. Your order has been placed, and the system will notify you once the order is filled. You will then be able to monitor your option position.
If this is your first time buying an options contract, then we suggest that you practice it on a simulation account in thinkorswim to ensure that you have the correct steps to purchase and sell your option when you are ready to make a profit.
Please note that you also have the choice to buy options via the thinkorswim Mobile app. However, we would not recommend using your mobile app until you are entirely familiar with the process and can purchase an option using either the Trade tab or Active Trader.
Summary of How to Buy an Option
The above provides the detailed steps on how to buy an option using thinkorswim. Before purchasing an option, it is crucial to ensure that you have practiced both the purchasing and selling process before using a live account. Once you run through the steps a few times, the process will be pretty simple.
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