There’s a strategy for everything — dieting, dating, dodging traffic. So, of course, there are strategies for trading options, too. And if you’re just starting, knowing which ones to try (and which to avoid) can save you a lot of stress and second-guessing.
If you’re asking questions like, “What is option trading in the share market?” or “What are puts and calls?” This guide will answer your questions and break down the options trading basics, including the best beginner-friendly options strategies with examples.
Buying Calls (Long Calls)
Buying a long call is a simple way to profit if you think a stock will go up. You don’t need to buy the stock — just the right to buy it at a set price called the strike price within a set time. It costs less than buying the stock and limits your risk to the premium paid. If the stock rises, your profit increases too. This is a classic option buying strategy used by many traders.
Example
Let’s say a stock trades at $50, and you buy a call option with a $55 strike price, expiring in a month. If the stock rises to $60, you can buy it at $55 and immediately profit $5 per share (minus the premium). If it stays below $55, you let the option expire worthless and only lose the premium.
Risk/Reward
- Risk: Limited to the premium paid.
- Reward: Unlimited profit potential if the stock keeps rising.
Buying Puts (Long Puts)
Buying a put (long put) is the best option strategy when you think a stock will drop. It gives you the right to sell at a set price before expiry without the high risk of short selling. If the stock falls, your put gains value. If it rises, you just lose the premium.
This strategy is perfect for traders who are bearish on a stock, ETF, or index but don’t want to go short and risk unlimited losses. There are no margin calls and no surprises.
Example
Suppose you buy a put option for a stock currently at $50, with a strike price of $45. If the stock drops to $40, you can sell it at $45, gaining $5 per share (minus the premium). If it stays above $45, your option expires worthless.
Risk/Reward
- Risk: Limited to the premium paid.
- Reward: High reward potential, especially in sharp downtrends, but capped if the stock falls to zero.
Covered Calls
If you own a stock and want to make some extra income, the covered call might be your go-to strategy. You sell a call option against it, collect a premium, and agree to sell it at a set price if it gets there.
This strategy works best when you think the stock will move sideways or rise slightly. You’re not aiming for huge gains here — you’re playing it smart and steady, collecting income as you go.
Example
If you own 100 shares of a stock trading at $50 and sell a call option with a $55 strike, you collect a premium upfront. If the stock rises above $55, your gains are capped. However, you still keep the premium. You keep the stock and the premium if it doesn’t rise above $55.
Risk/Reward
- Risk: This is similar to owning the stock. If the stock falls, there is a downside risk, but the premium cushions the loss.
- Reward: Limited to the premium collected plus any gain up to the strike price.
Protective Puts
Think of a protective put as a safety net for your stock. You still own the stock, but buy a put option just in case it drops. It’s basically portfolio insurance; that kind of peace of mind can be worth the cost for volatile markets.
If the stock falls, the put rises in value and helps limit your losses. If the stock climbs, your put expires, and you still enjoy the upside.
Example
Say you hold a stock at $50 and buy a $45 put. If the stock drops to $40, you can sell it at $45, limiting your loss to $5 plus the premium cost. If the stock rises to $60, the put expires worthless, but you enjoy the gain on the stock.
Risk/Reward
- Risk: Limited to the premium plus the difference between the purchase and strike prices.
- Reward: Unlimited upside if the stock climbs.
Long Straddles
Long straddles work best when you can’t decide which way a stock will move, but you’re sure it will move big. With this strategy, you buy a call and a put option at the same strike price and expiration. It’s ideal around big events like earnings reports or news announcements where volatility is expected, but direction is a mystery.
If the stock takes off or crashes, one side of your trade will take off, too. However, if it just sits there, you lose the premiums on both.
Example
You buy both a call and a put at a $50 strike price. If the stock jumps to $60 or drops to $40, your profit on one side can outweigh the loss on the other. But if the stock stays at $50, both options may expire worthless.
Risk/Reward
- Risk: Total of both premiums paid.
- Reward: High, if the stock moves significantly in either direction.
Some Basic Other Options Strategies
Once you’ve got a feel for puts and calls, here are a few other beginner-level option trading strategies worth knowing.
- Married Put Strategy: This involves buying a stock and an at-the-money (ATM) put option simultaneously to protect your stock.
- Protective Collar Strategy: Here, you own the stock, buy a downside put, and sell an upside call — both out-of-the-money.
- Long Strangle Strategy: You buy an OTM call and an OTM put with the same expiration but different strike prices for a long strangle.
- Vertical Spreads: You buy one option and sell another of the same type (both calls or puts), with the same expiration but different strike prices.
- Cash-Secured Put: A cash-secured put requires selling a put on a stock you wouldn’t mind owning and keeping enough cash ready in case you get assigned.
Advantages and Disadvantages of Trading Options
Like with everything, trading options has its perks and downsides:
Advantages
- Limited Risk with High Upside: When buying options, your maximum loss is limited to the premium paid, but your profit potential, especially with calls, can be significant.
- Leverage: Options let you control more for less.
- Flexibility: Stock options trading gives you strategies for bullish, bearish, and even neutral market conditions.
- Hedging Tool: You can use options to protect gains or limit losses on existing stock positions.
- Income Generation: Option selling strategies like covered calls or cash-secured puts offer a way to generate consistent premium income.
Disadvantages
- Complexity: Options are more advanced than buying and selling stocks.
- Time Decay: Options lose value as the expiration date approaches, especially if they remain out-of-the-money.
- All-or-Nothing Risk for Buyers: If the stock doesn’t move enough to go in the money, the option expires worthless, and you lose 100% of the premium.
- Volatility Risk: Sharp market moves or low liquidity can lead to wider spreads and slippage.
- Not Beginner-Proof: Many beginners underestimate the risk and overtrade without fully understanding how options trading works.
What Are the Levels of Options Trading?
Before you start trading options, your broker will assign you an options trading level. These levels match your experience and account type to the risk of the strategies you’re allowed to use. In short, the more complex and risky the strategy, the higher the level you need.
Here’s a breakdown of the typical levels:
- Level 1: Covered Calls and Protective Puts
- Level 2: Buying Calls, Puts, Straddles, and Strangles
- Level 3: Vertical and Multi-Leg Spreads
- Level 4: Selling Naked Options
How Can I Start Trading Options?
Here’s how to do options trading — a must-read for those asking how to trade options:
- Pick a Brokerage: Choose a platform with options access.
- Apply for Options Approval: You’ll fill out a form about your financial background and experience.
- Fund Your Account: Transfer capital to trade with.
- Start Small: Use demo accounts or low-risk trades to build skill.
When Do Options Trade During the Day?
Most options trade from 9:30 AM to 4 PM EST on business days. Some ETFs and indexes also offer extended hours trading, but liquidity may be limited.
Where Do Options Trade?
Options are listed and traded on regulated exchanges such as:
- CBOE (Chicago Board Options Exchange)
- NYSE American Options
- Nasdaq Options Market
Can You Trade Options for Free?
Some brokers, like Robinhood and Webull, offer commission-free options trading but may still charge small regulatory fees. Also, beware of wider spreads, which can cost you indirectly.
General
Options trading for beginners offers a versatile way to earn in the market, whether it’s moving up, down, or sideways. Call and put option trading and protective puts are easy and effective for beginners.
But remember: even the best option strategy carries risk. Take time to learn options trading and the options trading examples. You can only develop the best option strategy through practice and patience.
