Stock Options Trading Basics
Options give you the right (not obligation) to buy or sell stocks at a specific price.
Understanding Options
Call Options
- Right to BUY at strike price
- Profit when stock goes UP
- Pay premium for the right
- Limited risk (premium paid)
Put Options
- Right to SELL at strike price
- Profit when stock goes DOWN
- Pay premium for the right
- Like insurance for your stock
Key Terms
Strike Price
- The price you can buy/sell at
- In-the-money: Profitable if exercised
- Out-of-the-money: Not profitable yet
- At-the-money: Strike equals current price
Expiration
- Options expire on specific date
- Weekly, monthly, quarterly, LEAPS
- Time works against option buyers
- Longer duration = more expensive
Premium
- Price you pay for the option
- Intrinsic value + time value
- Affected by volatility
- Maximum loss for buyers
The Greeks
Delta
- How much option moves per $1 stock move
- Calls: 0 to +1
- Puts: -1 to 0
Theta
- Time decay per day
- Hurts buyers
- Helps sellers
- Accelerates near expiration
Implied Volatility (IV)
- Expected future volatility
- Higher IV = more expensive options
- IV crush after earnings
Basic Strategies
Long Call (Bullish)
- Buy call option
- Limited risk, unlimited upside
- Need stock to move up enough
Long Put (Bearish)
- Buy put option
- Limited risk, large downside potential
- Protective put hedges stock position
Covered Call
- Own stock + sell call
- Generate income
- Cap upside at strike price
- Popular income strategy
Risk Management
- Never risk more than 5% on options
- Start with defined risk strategies
- Understand max loss before entering
- Avoid out-of-the-money cheap options
- Start paper trading first