Options Trading for Beginners

Options Trading Basics

• An option is a contract between a buyer and seller that grants the right, but not the obligation, to buy or sell a stock at a specified price (strike price) within a set time period.

Call Options

• A call option gives the buyer the right, but not the obligation, to buy a stock at a specified price (strike price) within a set time period.
• Buying a call option requires paying a premium, which is the cost of purchasing the options contract, quoted per share.
• Examples of call option scenarios:
  • Profitable: Stock price rises above the strike price plus the premium.
  • Unprofitable: Stock price does not rise above the strike price plus the premium, and the option expires worthless.

Covered Calls

• A covered call is a strategy where the seller owns the underlying stock and sells a call option against it.
• Benefits of covered calls include generating income from the premium received.
• Risks of covered calls include potentially having to sell the stock if the price rises above the strike price.

Key Concepts

• Strike Price: The specified price at which the buyer can buy (call option) or sell (put option) the underlying stock.
• Premium: The cost of purchasing the options contract, quoted per share.
• Expiration Date: The date by which the option must be exercised or it expires worthless.
• Option Chain: A list of available option contracts for a particular stock, with various strike prices and expiration dates.
• Contract Size: Options contracts typically represent 100 shares of the underlying stock.

Risk Management

• Options trading involves significant risk, especially with short-term contracts.
• Beginners should understand potential losses, which can be the entire premium paid.
• Longer expiration dates provide more time for the stock price to move favorably but are more expensive.

Real-World Applications

• Platforms like Robinhood allow users to trade options, showing available contracts with various strike prices and expiration dates.

Put Options

• A put option gives the buyer the right, but not the obligation, to sell a stock at a specified price (strike price) within a set time period.
• Examples of put option scenarios: Buying a put option for a stock at a specified strike price, paying a premium per share.