Options Trading Starter Pack


If you are new to options trading, here are a few basic concepts to understand, along with a few videos from our trading team to get you ready to start trading. For more general help, check out our Trading 101 Starter Pack

There are two types of option contracts: calls and puts. 

A call option gives you the right, but not the obligation, to buy an asset at a predetermined price (known as the strike price). Generally speaking, when you buy a call option, you are bullish, betting on the underlying asset to rise in value. 

A put option gives you the right, but not the obligation, to sell an asset at a predetermined price. Generally speaking, when you buy a put option, you are bearish, betting on the underlying asset to decrease in price. 

Usually, equity options represent 100 shares of the underlying asset. 

This is how you formulate the price you would pay for a trade. For example, if you wanted to purchase one call option for imaginary stock XYZ and the price was $1 for the contract, you would pay $100 (1 contract x 100 shares per contract x price paid) for that trade.


The fact that each option contract contains 100 shares of the underlying asset is how they are able to provide extra leverage in your trading. In other words, just a small move in a stock could result in a big percentage move for an option. 

Every option contract has an expiration date

The tricky part about option contracts is that they all expire on a certain date. So, whatever move you are betting on will need to happen before the expiration date. 

Show me exactly how to enter an options trade

 

There are different ways to trade options. For example, you can sell to open an option...


If you do sell to open, you would then need to buy to close...


Okay, so how are options priced? 

First, you should know that the "ask" price refers to the lowest price an option seller is willing to accept on a trade, while the "bid" price is the highest price a buyer is willing to pay. From there, what you need to learn about is historical volatility and implied volatility. This is part of the equation for how option contracts derive their values. 


So what are "cheap" options then?


Okay, now show me the difference between spreads and straight options

Spread traders involve multiple option contracts in the same trade. There are many different types of spread trades, but we can show you a simple example in the video below. 


I've heard the terms "In the money" and "out of the money," what are those exactly?

If a call option has a strike price of $50, and the underlying stock is trading at $45, this means that the option contract is $5 "out of the money." On the other hand, if you take the $40 call option for the same stock, that call would be $5 in the money. Here is more info on these terms...

 


What about the Cboe Volatility Index (VIX)? Doesn't that affect options?

Wait a minute, how did you know that? Are you sure you're a beginner?