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Unlike stocks, which can be bought on margin, options can only be bought with cash (i.e., they are not marginable). However trading in certain options (such as writing naked puts) may also require a margin account with minimum equity requirements. Many brokers may not even allow certain types of options trading, such as writing naked calls, as the risks may be too high for the brokers if there are sudden large unfavorable moves in the underlying securities.

Many brokers would require you to qualify for trading options before allowing you to do so. Moreover they may have several levels of qualification for various types of trading, such as spreads, naked puts, etc. They are also required to send you a booklet titled "Characteristics and Risks of Standardized Options" published cooperatively by several exchanges including CBOE. This booklet is also available in electronic format from several Web sites including CBOE's. I hope you take the time to read and understand it, as it has a lot of relevant information on options authored by people who are in the business.

Another important factor to consider in trading options is cost. Options trading can be a lot more expensive than trading stocks. While many brokers may charge a nominal fee for trading stocks even for a large number of shares, options carry much higher commission fees and the commissions are usually proportional to the number of contracts traded. The more contracts traded, the higher the commission price. We omitted the commission factor in this chapter for the sake of simplicity, but commissions often make up a large part of the cost of trading options. If you see an option with a $1/16 premium, do not simply assume that you can buy many contracts inexpensively. Depending on the number of contracts, you may pay more on commission than you would for the contracts themselves. We had the luxury of omitting commissions in our examples. You won't have the same luxury trading options in real world. Be very mindful of …