How to Use Options Simulators

It is time to talk simulators but, we are sorry to say, not virtual reality. At least, not in the Star Trek sense.

But in the financial sense… we are closer than you might think.

You see, here is the situation. You have signed up for an account to buy and trade options contracts. You have invested in tutorials to get a sense of how the market works and how the professionals behave. (If you have not, well… they are a pretty good place to start).

(Pro tip: See our trading products, some of which include access to great trading rooms where you can see options trading experts in action.)

You may have even picked up a market timer, so you have the data to use when making those first trades.

Now, before putting any actual money on the line, you would probably like to do a bit of practice. That is where simulators come into play.

What are they?

An options trading simulator is exactly what it sounds like; it is a program that simulates what would happen to a hypothetical option trade using real market data. A simulator is basically like playing the stock market game. Instead of putting your money on the line, the computer pretends that you hold a given option and then tracks the contract’s performance.

Why use one?

Why use an option trading simulator? There are two ways to look at this. The first is for new traders looking to get their feet under them. If you fall under this category, an options trading simulator can be an invaluable tool because it lets you see how volatility and asset value affect your position.

The simulator lets you see how delta, theta, vega and gamma plays out in real life. It allows you to interact with these concepts, seeing how your premiums respond to market volatility or how your profit margin swings in response to the underlying asset. Most importantly, the simulator lets you lose the pretend money while you figure this out.

If you are not making mistakes, you are not really learning. It is just that it is best not to apply that philosophy when real money is at stake.

Pictured: Not your retirement plan.

For experienced traders, an option simulator has another key benefit. It lets you figure out new strategies to apply in real-world trading.

As has been covered in this space before, the complexity offered by options contracts opens up a lot of opportunities when it comes to sophisticated trading. Hedges, straddles, condors, and much, much more are all a part of the option trader’s tool kit.

Like all sophisticated endeavors, this takes some planning. Figuring out exactly how you want to set up a complicated series of trades is easier when you can actually see the numbers right up on the board. A trading simulator is an excellent tool for this, allowing you to figure out your next steps long before you put any money at stake.

How do you use one?

There are a lot of trading simulators from which to choose. Some are as simple as interactive spreadsheets that try and give a bit of feedback to the user, but the best simulators try and mimic actual trading conditions. Here are three good ones:

Investopedia offers a simulator that is highly regarded and comes with fairly extensive documentation.

The CBOE also offers a free trading simulator through its website, one which carries some weight of authority due to the source.

Finally, the Wall Street Journal’s MarketWatch offers a simulator game which is unique in its interactivity among users and may be just the thing for someone looking for support or advice among colleagues.

When you feel comfortable about your strategy for trading options, it is time to try Market Timer for one month at a special introductory price. Happy trading!