Options Trading Basics
Master the fundamentals of options trading - calls, puts, strikes, and strategies that can amplify your returns
What Are Options?
Options are financial contracts that give you the right, but not the obligation, to buy or sell an underlying asset at a predetermined price before a specific expiration date.
Think of an option like a deposit on a house. You pay a small amount (the premium) for the right to buy the house at an agreed price later. If you decide not to buy, you only lose the deposit.
Options are derivatives - their value is derived from an underlying asset like stocks, ETFs, or indices. They offer leverage, limited risk (when buying), and strategic flexibility.
Calls vs. Puts
Call Options
Right to BUY at the strike price
- • Bullish bet - profits when price rises
- • Max loss = premium paid
- • Max profit = unlimited (theoretically)
- • Break-even = strike + premium
Put Options
Right to SELL at the strike price
- • Bearish bet - profits when price falls
- • Max loss = premium paid
- • Max profit = strike price - premium
- • Break-even = strike - premium
Essential Options Terminology
| Term | Definition | Example |
|---|---|---|
| Strike Price | Price at which you can buy/sell | AAPL $180 call = right to buy at $180 |
| Premium | Cost to buy the option | $3.50 per share × 100 = $350 per contract |
| Expiration | Date option expires worthless if not exercised | Jan 19, 2025 expiration |
| In-the-Money (ITM) | Option has intrinsic value | Stock at $185, $180 call is ITM |
| Out-of-the-Money (OTM) | Option has no intrinsic value | Stock at $175, $180 call is OTM |
| At-the-Money (ATM) | Strike equals current price | Stock at $180, $180 call is ATM |
Why Trade Options?
Leverage
Control 100 shares with a fraction of the capital. Small moves create big percentage gains.
Limited Risk
When buying options, your maximum loss is limited to the premium paid.
Strategic Flexibility
Profit from up moves, down moves, or even sideways markets with different strategies.
Hedging
Protect your stock positions from downside risk using put options as insurance.
Income Generation
Sell options to collect premium income on stocks you own or want to buy.
Speculation
Make leveraged directional bets with defined risk and high reward potential.
Example Call Option Trade
Trade Setup:
- Stock: AAPL at $175
- Option: $180 Call
- Premium: $3.00 ($300 per contract)
- Expiration: 30 days
Outcomes:
- Break-even: $183 ($180 + $3)
- Max Loss: $300 (premium paid)
- If AAPL hits $190: $700 profit
- If AAPL stays at $175: $300 loss
Key insight: To make $700 profit on stock alone, you'd need to invest $17,500 (100 shares). With the call option, you only risked $300 for the same upside potential - that's the power of leverage.
Basic Options Strategies
Long Call (Bullish)
Buy a call option when you expect the stock to rise. Limited risk, unlimited profit potential. Best for strong upside conviction.
Long Put (Bearish)
Buy a put option when you expect the stock to fall. Limited risk, profits as stock declines. Great for bearish bets or hedging.
Covered Call (Neutral to Bullish)
Own 100 shares and sell a call against them. Collect premium income while waiting. Caps upside but generates steady returns.
Protective Put (Hedging)
Own shares and buy puts for insurance. Limits downside risk while maintaining upside. Like buying insurance on your portfolio.
Options Trading Risks
Options can be risky if not understood properly. Be aware of these dangers:
Frequently Asked Questions
What is an option in trading?
An option is a contract giving you the right (but not obligation) to buy or sell an asset at a specific price before a certain date. Call options give the right to buy; put options give the right to sell.
How much money do I need to start options trading?
You can start trading options with $500-2,000, though $5,000+ is recommended for proper diversification. Options can cost as little as $50-100 per contract for cheaper stocks.
Are options riskier than stocks?
Options can be riskier because they can expire worthless (100% loss). However, buying options limits your max loss to the premium paid, unlike short selling stocks which has unlimited risk.
What is the difference between calls and puts?
Call options profit when the underlying asset rises - you have the right to buy at the strike price. Put options profit when the asset falls - you have the right to sell at the strike price.
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Risk Disclosure: Trading involves substantial risk of loss and is not suitable for all investors. This content is for educational purposes only and does not constitute financial advice.
Last updated: December 2025