Options trading can seem complex at first, but understanding the fundamentals opens up a world of trading strategies that can help you manage risk and enhance returns.
What Are Options?
An option is a contract that gives the buyer the right—but not the obligation—to buy or sell an underlying asset at a specific price before or on a specific date.
Call Options
A call option gives you the right to buy the underlying asset at the strike price. Traders buy calls when they expect the price to go up.
Put Options
A put option gives you the right to sell the underlying asset at the strike price. Traders buy puts when they expect the price to go down.
Key Terms to Know
- Strike Price: The price at which you can buy (call) or sell (put) the underlying
- Premium: The price you pay for the option contract
- Expiration Date: The date when the option expires
- In the Money (ITM): An option that has intrinsic value
- Out of the Money (OTM): An option with no intrinsic value
- At the Money (ATM): Strike price equals the current stock price
The Greeks
The Greeks measure different aspects of risk in options:
- Delta: How much the option price changes for a $1 move in the stock
- Gamma: The rate of change of delta
- Theta: Time decay—how much value the option loses each day
- Vega: Sensitivity to changes in implied volatility
Getting Started
- Start with paper trading to practice without real money
- Focus on understanding single-leg strategies first
- Use our calculator to price options
- Learn about implied volatility with our IV calculator
Options trading involves significant risk. Make sure you understand the risks before trading with real money.