Beginner’s Guide To Options Trading Strategies

How to Trade Options for Beginners

This is much easier said than done, but you will be surprised how many predictions you can make with the right research. A covered call involves selling a call option (“going short”) but with a twist. Here the trader sells a call but also buys the stock underlying the option, 100 shares for each call sold. Owning the stock turns a potentially risky trade — the short call — into a relatively safe trade that can generate income.

How to Trade Options for Beginners

Then, in three months and assuming the option is in-the-money, we’d close our position with a sell-to-close order. Recall that typically, investors want to buy calls or sell puts if they’re bullish and buy puts or sell calls when they’re bearish. For our example, a SPY call that’s at-the-money that expires in three months (when your bullish outlook is expected to end) would be sufficient.

Open an account today

You are solely responsible for your investment decisions, and should carefully evaluate the examples to help determine whether or not they are right for you based on your own personal situation. The use of this tool does not constitute an investment recommendation by Schwab, and should also not be considered financial, legal or tax advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner, or investment manager. To start trading options, you’ll need to find a broker that offers options trading and then enable that feature on your account. Generally, the second option is the same type and same expiration but a different strike.

Overall, the experience is meant to mimic the real practice without the same stakes. While the practice is somewhat limited in terms of features, it can still help you dip your toes in the water as you learn more. “The options markets offer bullish and bearish strategies, hedging and speculative trading opportunities and varying degrees of potential for risk and profit,” Frederick says. “Options strategies may be based on time value, volatility or even interest rates.”

Determine the option time frame

Now, let’s say a call option on the stock with a strike price of $165 that expires about a month from now costs $5.50 per share or $550 per contract. Given the trader’s available investment budget, they can buy nine options for a cost of $4,950. Because the option contract controls 100 shares, the trader is effectively making a deal on 900 shares. If the stock price increases 10% to $181.50 at expiration, the option will expire in the money (ITM) and be worth $16.50 per share (for a $181.50 to $165 strike), or $14,850 on 900 shares. That’s a net dollar return of $9,990, or 200% on the capital invested, a much larger return compared to trading the underlying asset directly. Buying calls is a great options trading strategy for beginners and investors who are confident in the prices of a particular stock, ETF, or index.

Though short-selling also allows a trader to profit from falling prices, the risk with a short position is unlimited because there is theoretically no limit to how high a price can rise. With a put option, if the underlying ends up higher than the option’s strike price, the option will simply expire worthless. With a call option, the buyer of the contract purchases the right to buy the underlying asset in the future at a predetermined price, called exercise price or strike price. With a put option, the buyer acquires the right to sell the underlying asset in the future at the predetermined price. Once you have prepared yourself for trading options by following these steps, you’re ready to start trading options in a live account once you identify a suitable opportunity in the market.

$0.65 fee per option contract¹

For Broker Assisted Options Commissions, add $25 to the Online Options Commission. Complex option orders involving both an equity and an option leg, including Buy/Writes or Write/Unwinds are charged per contract fees for the option. Idea Hub offers self-directed investors the ability to explore new trading ideas for options that are determined based on pre-set screening criteria. Please note that Idea How to Trade Options for Beginners Hub does not consider open orders, existing positions, or other factors, and is solely intended for educational and informational purposes. The examples within the Idea Hub are not intended as recommendations to buy, sell or hold any particular security nor implement any particular strategy. Users of the Idea Hub should not make investment decisions based solely upon the ideas generated by this tool.

How to Trade Options for Beginners