Options trading has surged in popularity, especially during periods of market volatility like the COVID-19 pandemic. According to data from the Chicago Board Options Exchange (CBOE), individual investor participation in options markets has roughly quadrupled over the past five years. Unlike traditional stock trading, options offer leverage, strategic flexibility, and the ability to profit in various market conditions—rising, falling, or flat. This guide breaks down everything you need to know about options trading, from foundational concepts to practical strategies and risk considerations.
Understanding the Basics of Options
An option is a financial contract that gives the holder the right—but not the obligation—to buy or sell an underlying asset at a predetermined price (the strike price) within a specific timeframe. Each stock option contract typically represents 100 shares of the underlying stock.
There are two primary types of options:
- Call Option: Grants the right to buy an asset at the strike price before expiration.
- Put Option: Grants the right to sell an asset at the strike price before expiration.
The cost of purchasing an option is known as the premium, which is paid upfront by the buyer to the seller (also called the writer).
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For example, suppose gold is trading at $1,750 per ounce, and a trader expects it to rise. They buy a call option with a strike price of $1,760 expiring in one month. If gold rises above $1,760, they can exercise the option and buy at a discount. If it stays below, they let the option expire, losing only the premium paid.
Where Are Options Traded?
Most U.S. options are traded on regulated exchanges such as:
- Chicago Board Options Exchange (CBOE) – The largest U.S. options exchange.
- American Stock Exchange (AMEX)
- Pacific Stock Exchange (PSE)
Internationally, major platforms include Eurex and the Montreal Stock Exchange.
Additionally, an over-the-counter (OTC) market exists where institutions trade customized, non-standardized options directly between parties without centralized exchange oversight.
How to Start Trading Options
To begin trading options, you must open a brokerage account and apply for options trading approval. Due to their complexity and risk, brokers assess your experience, account size, and risk tolerance before granting access.
Once approved, you can execute trades based on your market outlook:
- Bullish? Buy calls or sell puts.
- Bearish? Buy puts or sell calls.
- Neutral/Sideways? Sell options (e.g., covered calls or cash-secured puts).
Choosing the right strike price is crucial. For instance, if Tesla (TSLA) trades at $770 and you expect it to reach $900, buying a call with a strike under $900 positions you for potential profit if the stock rises above that level—this is known as being "in the money."
Conversely, if Amazon (AMZN) trades at $3,400 and you anticipate a drop to $3,000, buying a put with a strike at $3,200 allows you to sell above market value if the price falls—again, placing the option in the money.
Options come in two styles:
- American-style: Can be exercised anytime before expiration.
- European-style: Can only be exercised at expiration.
Reading an Option Chain
An option chain (or option matrix) displays all available call and put options for a given security, including strike prices, expiration dates, premiums, volume, and open interest.
Key terms when reviewing an option chain:
- Near the money: Strike price close to the current market price.
- In the money (ITM): Option has intrinsic value; profitable to exercise.
- Out of the money (OTM): No intrinsic value; would result in a loss if exercised.
The “Strike” column shows the price at which the underlying asset can be bought (for calls) or sold (for puts). Sellers (writers) are obligated to fulfill the transaction if assigned.
Trading Hours for Options
Options on U.S. equities follow standard stock market hours:
9:30 AM to 4:00 PM Eastern Time (ET) on NYSE and Nasdaq.
After-hours trading is available via electronic networks from 4:00 PM to 6:00 PM ET.
Are There Fees for Options Trading?
While many brokers now offer commission-free stock trades, options typically involve per-contract fees. A common rate is **$0.65 per contract**. For example, buying five contracts costs $3.25 in fees. Major brokers like Charles Schwab, Fidelity, and Ameritrade currently charge this standard fee structure.
Core Options Trading Strategies (With Examples)
Long Call
A bullish strategy where you buy a call option expecting the stock to rise above the strike price.
Example: Karen buys a 3-month call on Acme Corp ($50/share) with a $50 strike and pays a $2/share premium. When shares rise to $90, she exercises the option, buys at $50, sells at $90, and nets $3,800 after deducting the $200 premium.
Short Call
Selling a call option, usually when bearish or neutral. Profit comes from collecting the premium.
Example: Steve sells a call on Virtucon ($75/share) at $75 strike for $3/share. If shares fall to $50, he keeps the $300 premium. But if shares jump to $100, his loss could reach $2,200.
Long Put
Buying a put to profit from a decline or hedge a long position.
Example: George buys a put on Wonka Industries ($200/share) with a $200 strike and $3/share premium. When shares drop to $175, he profits $2,200 after costs.
Short Put
Selling a put while holding enough cash to buy the stock if assigned—ideal for bullish investors.
Example: Olivia sells a put on Cyberdyne ($50/share) with a $50 strike for $2/share. If shares rise to $60, she keeps the $200 premium. If they fall to $40, she may face an $800 loss.
Covered Call
Owning 100 shares and selling one call option against them. Generates income but caps upside.
Example: Martina owns Parker Industries shares and sells a call at $215 strike. Even if shares rise slightly or fall modestly, she keeps the premium and offsets losses.
Cash-Secured Put
Selling a put with sufficient funds to buy the stock if assigned—used to enter long positions at desired prices.
Example: Ronald sells a put on Alchemax with $6,000 set aside. If shares stay above $60, he earns $200; if not, he buys at $60 anyway—his intended entry point.
Married Put
Buying stock and a put option for downside protection—like insurance.
Example: Susan buys Lexcorp shares at $50 and a put at $45 strike. When shares crash to $20, she sells at $45, limiting her loss despite market turmoil.
Options vs. Stocks: Key Differences
| Aspect | Stocks | Options |
|---|---|---|
| Ownership | Yes – partial ownership in company | No – only contractual rights |
| Dividends | Eligible if held | Not entitled |
| Capital Required | Higher (full share price) | Lower (premium only) |
| Risk Profile | Limited to investment amount | Varies: limited for buyers; potentially unlimited for sellers |
| Strategic Flexibility | Limited to directional bets | High – profits possible in any market condition |
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Options Trading Approval Levels
Brokers assign levels based on experience and risk capacity:
- Level 1: Covered calls & cash-secured puts
- Level 2: Buying calls and puts
- Level 3: Spreads (multiple-leg strategies)
- Level 4: Naked/uncovered options (highest risk)
Higher levels unlock more complex strategies but require deeper knowledge and larger margin availability.
Advantages and Disadvantages of Options Trading
Pros
- Leverage & Cost Efficiency: Gain large market exposure with minimal capital.
- Defined Risk (for buyers): Maximum loss is the premium paid.
- Strategic Versatility: Profit from volatility, time decay, or neutral markets.
- Hedging Capability: Protect portfolios against downturns using puts.
Cons
- High Risk for Sellers: Unlimited loss potential on uncovered calls.
- Low Liquidity: Many stocks lack active options markets.
- Complexity & Learning Curve: Requires understanding of Greeks, volatility, and pricing models.
- Time Decay: Options lose value as expiration nears (theta decay).
Frequently Asked Questions (FAQ)
Q: Is options trading gambling?
A: No—it’s not gambling when used strategically. Many investors use options for hedging or income generation rather than speculation.
Q: What are the best books on options trading?
A: Option Volatility and Pricing by Sheldon Natenberg is widely regarded as the definitive guide for serious traders.
Q: How long has options trading existed?
A: Its roots trace back to ancient Greece, where philosopher Thales used early forms of call options to secure olive press rights.
Q: Who invented modern options trading?
A: American financier Russell Sage developed structured call and put contracts in the late 1800s.
Q: Can I trade options with little money?
A: Yes—due to leverage—but small accounts face higher proportional risks and limited strategy choices.
Q: Do options expire on weekends?
A: Most equity options expire on Fridays; settlement occurs the next business day.
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Final Thoughts
Despite its technical reputation, options trading is accessible and highly strategic when approached with education and discipline. Whether you're looking to generate income, hedge investments, or speculate with controlled risk, options provide tools suited for diverse goals. With proper risk management and gradual progression through trading levels, both new and experienced investors can harness the power of options effectively in 2025 and beyond.