Paper trading options indicate the practice of investors trading options using a simulated online account with no actual money involved. The service is offered by investment firms and other websites, and it allows investors to get a feel for the complexity and intricacy of options trading, which involves investors either buying or selling options to buy or sell shares of underlying stocks at some point in the future. Investors who are paper trading options should do so with the idea of getting familiar with all of the terminology of the options market. An investor should use paper trading as a way to test strategies while always keeping his actual investment reality in mind.
Options trading is a complicated process, but not one that traders should ignore simply because of that complexity. Even though trading options requires the ability to tell not only which way stocks are going to move but when they'll make those moves, it can be a hugely profitable exercise if investors gain the proper expertise. Paper trading options can give them this expertise without risking any of their own money.
The most important thing that a potential investor should do when paper trading options is to familiarize himself with all of the terminology of options trading and understand how the process works. An investor can use paper trading to get a feel for the difference between a call option, which gives the buyer the option to buy 100 shares of an underlying stock, and a put option, which gives the buyer the option to sell 100 shares. He should also understand the concept of the premium, which is the upfront amount that an options contract costs, and the strike price, which is the point either above or below the current stock price that the options contract may be exercised.
Once an investor has the basics of options down pat, she should use paper trading options as a test run for an actual account. Since there is no money at stake, many investors make the mistake of trading unrealistically in their simulated accounts. Investors should trade their paper accounts as if they were using their own money so they can tell what risks they can take.
It can be a good idea for an investor who already trades on the options market to also try paper trading options. This is an effective way for such an investor to attempt options strategies about which he might be uncertain. For example, a risky maneuver like a naked sell, in which an investor sells a call option to a buyer without owning the underlying shares as a hedge against a huge price spike, might be best attempted first in a paper trade. Once the investor gets a feel for how to pull it off, he might try it for real.