What is Options Trading?
Options give you the right, but not the obligation, to buy or sell a stock at a specific price within a certain timeframe. Think of it like buying insurance – you pay a small premium for the right to make a decision later.
How Options Work
There are two types: calls (betting price goes up) and puts (betting price goes down). You can buy options to speculate on price movement, or sell them to generate income from stocks you own.
Basic Options Types
- Call Options – Right to buy at strike price
- Put Options – Right to sell at strike price
- Covered Calls – Selling calls on stocks you own
- Cash-Secured Puts – Selling puts with cash backing
Why Trade Options?
- Lower capital required – Control 100 shares for fraction of cost
- Limited risk – Can’t lose more than premium paid (when buying)
- Flexible strategies – Profit in any market direction
- Income generation – Earn premiums from selling options
Common Beginner Mistakes
- Buying cheap, far out-of-money options – Usually expire worthless
- Not understanding time decay – Options lose value as expiration approaches
- Over-leveraging – Using too much of account on single trades
- Ignoring liquidity – Some options are hard to sell
Should You Trade Options?
Options require understanding of multiple moving parts: stock price, time, volatility, and strike prices. Start with paper trading and focus on liquid stocks with tight bid-ask spreads.
Getting Started
Most brokers require options approval levels. Begin with basic buying strategies before advancing to selling options or complex spreads.
Next Steps Check our broker reviews to find platforms with good options education and reasonable commission structures.
