Options Trading Basics

Eager to begin trading options? Start your path towards long-term trading success right here!

Our tutorials will guide you through options trading basics – including how to place your first trades.

options trading basics: what are options

What are options?

Options trades are financial derivative instruments that are traded on the Chicago Board of Option Exchange (CBOE).

There are four major advantages to trading options: cost, leverage, speed and the ability to make a steady income.

options trading basics: how do options work

How do options work

Options are financial derivative instruments that are contracts between a seller and a buyer. The contract offers the buyer the right, but not the obligation, to purchase the underlying instrument (stock, commodity, index, or bond) at a specific price (called the strike price) by a certain time.

Once the contract deadline passes, the instrument expires. If the option is in the money, the contract is settled in cash or exchanged for shares. If it is out of the money, the option expires worthless.

options trading basics: how to trade options

How to Trade Options

To get started trading options you need to understand:

  • The psychology of trading – it’s a mental game more than anything else
  • Options trading basic strategies
  • Where to trade online

options trading basics: call v put

Options Trading Basics: Call v Put

The first thing all new options traders learn is the difference between call vs put options. There are major differences between the two – and one similarity: Options traders can buy and sell both for profit.

options trading basics: what is spread trading

What is spread trading

Spread trading is an options trading strategy in which we choose to sell spreads on out of the money options, a high probability bet. Our goal is to take advantage of time decay to capture premium on potentially expiring options.

It is very different from directional trading, which requires us to correctly (and thoughtfully) guess whether the market will move up, down, or sideways. With spread trading, we only care that the weekly or monthly options we are holding expire nearly or completely worthless.

options trading basics: options trading terminology

Options trading terminology

Our glossary of options trading terminology was put together with beginners in mind. Use it to learn the options trading basics.