What Is Option Trading?
- Felix La Spina
- Dec 2
- 4 min read
What Is Option Trading: INVESTING & TRADING STRATEGIES (Options Basics) Explained
Quick Answer
Option trading is the process of buying and selling financial contracts—called options—that give you the right, but not the obligation, to buy or sell a stock at a specific price before a specific date.
Options are powerful tools because they allow traders to:
Control 100 shares of stock with less money
Leverage smaller moves in the market
Generate income through premiums
Limit risk when used correctly
To understand how stock options work, you need to know the two main types: call options and put options. This article breaks down how they work, why traders use them, and how to approach options trading as a beginner.
What Is Option Trading? (Simple Explanation)
Option trading means trading contracts that derive their value from an underlying asset—usually a stock like AAPL, TSLA, or MSFT.
An option contract always includes:
Type: Call or Put
Underlying stock: e.g., AAPL
Strike price: The price you can buy/sell the stock
Expiration date: The last day the contract is valid
Premium: The price you pay to buy the option
Every standard stock option controls 100 shares of the underlying stock.
Source (SEC options basics): https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_options
Call Options Explained (Beginner Version)
A call option gives you the right to BUY a stock at a specific price before the contract expires.
Example:
You buy a Call Option on AAPL:
Strike price: $180
Expiration: 30 days
Premium: $3 per share ($300 total)
If Apple rises above $180:
Your call option increases in value
You can sell the option for profit
Or exercise the contract and buy shares at the lower strike price
If Apple stays below $180:
The option loses value
You can let it expire
Your maximum loss is the premium you paid
This is why beginners often start with calls—they offer limited risk and high upside.
For deeper chart analysis, use: https://www.stockeducation.com/advance-charts/
Put Options (Brief Overview)
A put option gives you the right to SELL a stock at a specific price before expiration.
Puts are commonly used to:
Profit when a stock goes down
Hedge (protect) long-term portfolios
Create insurance-like protection
OCC explanation of options: https://www.theocc.com/investor-education/what-are-options
How Do Stock Options Work? (Step-by-Step)
Here is the simplest explanation of how option contracts function:
1. You Choose a Direction
Do you think the stock is going:
Up → Buy a Call
Down → Buy a Put
2. You Pick a Strike Price
This is the price where the option becomes valuable.
Example:
If the stock is $100
A call with a $105 strike becomes valuable above $105
3. You Pick an Expiration Date
Options lose value over time. Near-term options are cheaper but riskier. Longer-term options give more breathing room but cost more.
4. You Pay a Premium
This is the price of the contract.
If premium = $2 Cost = $2 × 100 shares = $200
5. You Profit If the Option Moves in Your Favor
Calls gain value when:
The stock moves up
Volatility increases
Time is still remaining
Puts gain value when:
The stock moves down
Volatility increases
Time is still remaining
Investopedia detail on option mechanics: https://www.investopedia.com/terms/o/option.asp
Why Investors Use Options
Options are versatile. Traders use them for:
1. Leverage Without Owning the Stock
A call option lets you control 100 shares for far less capital.
2. Risk Management
Options can hedge downside risk in a long-term portfolio.
3. Income Generation
Selling options (like covered calls) generates steady premiums.
4. Directional Trading
Traders use calls or puts to speculate on short-term moves.
Explore sector/ETF overlaps using: https://www.stockeducation.com/ai-etf-analyzer/
Basic Option Trading Strategies for Beginners
These are simple, low-risk strategies ideal for learning.
1. Buying Calls
Ideal for beginners who want a defined risk.
Maximum loss = premium
Potential upside = unlimited
2. Buying Puts
Used when you expect a stock decline.
Maximum loss = premium
Potential profit = large (but not unlimited)
3. Covered Calls
An income strategy where you:
Own 100 shares
Sell a call option against those shares
You collect a premium and potentially sell the shares at a higher price if assigned.
4. Protective Puts
Used as insurance.
If you own shares and worry about a drop, buying a put locks in a minimum selling price.
Risks of Option Trading (Read Before Trading)
Options can be profitable, but traders must understand:
1. Time Decay (Theta)
Options lose value daily as expiration approaches.
2. Volatility Risk (Vega)
Options become more expensive when volatility rises.
3. Liquidity Risk
Some contracts have wide bid/ask spreads.
4. Potential to Lose 100%
If the option expires worthless, you lose the entire premium.
The best way to control risk is to size contracts appropriately and avoid over-leveraging.
How to Start Learning Options (Step-by-Step Guide)
Many beginners search “how do stock options work?” before placing their first trade. Here’s the right order to learn safely.
Step 1: Understand Calls and Puts
Master the basics before trying advanced strategies.
Step 2: Learn How Premiums Are Priced
Premiums are affected by:
Stock movement
Time remaining
Implied volatility
Step 3: Paper Trade Before Using Real Money
Practice for 1–2 months to build confidence.
Step 4: Start With One Contract
Avoid large positions early on.
Step 5: Track Every Trade
Use a notebook or spreadsheet to record:
Strike
Expiration
Premium
Reason for entry
Outcome
Tracking turns beginners into disciplined traders.
Use the ROI Calculator to measure performance: https://www.stockeducation.com/roi-calculator/
Free & Paid Courses to Learn Options Properly
Whether you’re learning what options are or diving deeper into call/put mechanics, these courses help beginners navigate options safely.
Free Beginner Investing Course
AI-Powered Investing Course (Includes Options Training)
{ "@context": "https://schema.org", "@type": "Article", "headline": "What Is Option Trading: INVESTING & TRADING STRATEGIES (options basics) Explained", "description": "Learn what option trading is, how call options work, and how stock options function. Beginner-friendly breakdown with strategies, examples, risks, and StockEducation tools.", "author": { "@type": "Organization", "name": "StockEducation.com", "url": "https://www.stockeducation.com/" }, "publisher": { "@type": "Organization", "name": "StockEducation.com", "logo": { "@type": "ImageObject", "url": "https://www.stockeducation.com/wp-content/uploads/2025/08/logo.png" } }, "url": "https://www.stockeducation.com/investing-and-trading-strategies/what-is-option-trading/", "datePublished": "2025-12-01", "articleSection": "INVESTING & TRADING STRATEGIES (options basics)", "keywords": [ "what is option trading", "call options explained", "how do stock options work", "options basics", "learn options trading" ], "mainEntityOfPage": { "@type": "WebPage", "@id": "https://www.stockeducation.com/investing-and-trading-strategies/what-is-option-trading/" }}
Comments