Options Trading Basics
Options seem complicated, but the core concepts are simple. Here's a plain-English guide to calls, puts, and how options actually work.
What Is an Option?
An option is a contract that gives you the right (but not the obligation) to buy or sell a stock at a specific price before a specific date.
Think of it like a reservation. You pay a small fee now to lock in a price, and later you decide whether to use it.
The Two Types of Options
📈 CALL Option
The right to BUY stock at a set price
📉 PUT Option
The right to SELL stock at a set price
Key Options Terms
Strike Price
The price at which you can buy (call) or sell (put) the stock. If Apple trades at $180 and you buy a $200 call, you're betting Apple goes above $200.
Expiration Date
The date your option expires. After this, the contract is worthless. Options can expire weekly, monthly, or even years out (LEAPS).
Premium
The price you pay for the option contract. This is your maximum loss when buying options.
Contract Size
One option contract controls 100 shares. So a $2 premium costs $200 total ($2 × 100).
Call Option Example
📊 Buying a Call: Real Numbers
Put Option Example
📊 Buying a Put: Real Numbers
Why Trade Options?
Leverage
Control 100 shares for a fraction of the stock price. $300 in options can produce the same gain as $18,000 in stock—or lose everything.
Defined Risk
When buying options, your max loss is the premium paid. You can't lose more than you invested (unlike shorting stock).
Hedging
Own stock? Buy puts to protect against downside. It's like insurance for your portfolio.
Income Generation
Sell covered calls on stocks you own to collect premium income.
Options Risks
Time Decay
Options lose value every day as expiration approaches. Even if the stock doesn't move, your option loses value. This is called "theta decay."
Total Loss
Most options expire worthless. Studies suggest 60-80% of options held to expiration expire out of the money. The leverage that amplifies gains also amplifies losses.
Complexity
Options pricing involves multiple factors (stock price, time, volatility, interest rates). It's easy to get surprised.
Where to Trade Options
Options pricing varies by broker:
- Robinhood: $0 per contract (free)
- Webull: $0 per contract (free)
- Public: $0 per contract + rebates
- Fidelity: $0.65 per contract
- Schwab: $0.65 per contract
- Tastytrade: $1 to open, $0 to close (capped at $10/leg)
Getting Started
- Open a margin account (required for most options)
- Apply for options approval (brokers assess your experience)
- Start with paper trading (Webull offers this free)
- Begin with simple strategies (buying calls/puts)
- Risk only what you can lose
The Bottom Line
Options are powerful but risky. The leverage that can turn $300 into $2,000 can also turn $300 into $0. Start small, understand the mechanics, and never risk money you can't afford to lose.