Options trading gives traders a way to take bullish or bearish positions, hedge stock holdings, and build strategies around price movement, time, and volatility. An option gives the buyer the right, but not the obligation, to buy or sell an underlying security at a specific strike price by a certain expiration date. A standard equity options contract typically represents 100 shares of the underlying stock.
Calls and puts are the starting point. Traders commonly use calls when they expect the underlying stock to rise and puts when they expect it to fall, but options can also be combined into spreads and other strategies for different market conditions.
Options have more moving parts than shares of stock. Expiration, implied volatility, time decay, liquidity, and the Greeks can all change the value of a contract even when the underlying stock moves in the direction you expected.
At Bullish Bears, we want traders to understand the contract and how it works before focusing on the strategy. Know the strike price, expiration, premium, liquidity, and maximum risk before entering. We also recommend paper trading options while you learn how contracts behave.
There are many different ways to trade options. Some traders use options for short-term day trading, while others use them for swing trading, hedging, or longer-term strategies. The strategy matters, but understanding what can make the contract gain or lose value matters just as much.
In This Guide, You'll Learn:
- How options contracts work
- What call and put options are
- Strike prices and expiration dates
- Options premiums and volatility
- Intrinsic and extrinsic value
- Options Greeks and time decay
- Common options trading strategies
- Spreads, speculation, and hedging
- Liquidity and options trading risks
Options Trading for Beginners: How It Works
Options trading becomes much easier to understand once you break every trade into the same basic pieces: the underlying security, whether you’re trading a call or put, the strike price, the premium, and the expiration date.
A call option gives the buyer the right to buy the underlying security at the strike price. A put option gives the buyer the right to sell it at the strike price. Standard equity options typically represent 100 shares, so a quoted premium of $1.00 generally represents $100 per contract.
The expiration date is important because options don’t last forever. We’re used to shares of stock where you can wait forever for the trade to work. With options, however, as expiration approaches, time value can decrease, which means an option may lose value even when the underlying stock isn’t moving a lot.
The strike price determines the price at which the security can be bought or sold if the option is exercised. Strike prices can be in the money, at the money, or out of the money depending on where the underlying security is trading.
Before you choose a contract, ask yourself some simple questions. How much time does the setup need? How far is the strike from the current price? How liquid is the contract? How much can you lose if the trade fails? The answers to those questions are decisions that matter just as much as whether you think the stock is going up or down.
How Does Options Trading Work?
- Options contract: Gives the buyer certain rights to buy or sell the underlying security
- Contract size: Standard options typically have 100 shares
- Call: Gives the buyer the right to buy at the strike price
- Put: Gives the buyer the right to sell at the strike price
- Strike price: The price the security can be bought or sold if exercised
- Premium: The price paid for the options contract
- Expiration: The date the contract expires
- Leverage: Gives you control of shares without having to purchase the same number of shares outright
- Debit spread: Combines options contracts for a net debit
- Credit spread: Combines options contracts for a net credit
The way an options contract works helps you decide if a trade is worth it or not. A bullish stock chart does not automatically mean every call option is a good trade, and a bearish chart does not automatically make every put attractive. The strike, expiration, premium, liquidity, implied volatility, and time remaining all affect whether the specific contract makes sense.
Options have more moving parts than simply deciding whether a stock will rise or fall. Implied volatility, time decay, intrinsic value, and the Greeks can all affect the premium.
Chart analysis still matters too. Understanding technical analysis and candlestick patterns can help you identify potential entries, exits, support, resistance, and the direction of the underlying security.
If you’re completely new to the market, start with our online trading courses to build your foundation. When you’re ready to go deeper into options specifically, our Options Trading Course covers calls, puts, spreads, Greeks, and options strategies step by step.
Calls and Puts Explained for Beginners
Calls and puts are the two basic types of options contracts. Understanding how they work is one of the first steps when learning how to trade options.
An options contract is an agreement involving an underlying security, a strike price, and an expiration date. Standard equity options typically represent 100 shares of the underlying stock.
The buyer of an option has the right, but not the obligation, to exercise the contract. The seller has an obligation to fulfill the terms of the contract if the buyer exercises it.
Call Options
Put Options
A put option gives the buyer the right to sell the security at the strike price on or before expiration, depending on the type of option. Traders usually buy puts when they expect the price of the underlying stock to fall.
For example, if XYZ is trading at $25 and you buy a $25 put, the contract can increase in value if the stock falls. How much the option changes in value depends on more than the stock price. Time until expiration, implied volatility, and the Greeks also affect the premium.
Buying a put can also be used as a hedge against a stock position. Instead of using the put strictly as a bearish trade, an investor may use it to help protect against a decline in shares they already own.
The premium paid to buy a call or put is generally the maximum loss for the option buyer. Option sellers can have very different risk profiles, which is why beginners should understand the difference between buying and selling options before placing a trade.
For a deeper breakdown of both contract types, read our guide to calls and puts.
Understanding Options Premiums and Value
An options premium is the price you pay to buy an options contract or the amount received when selling one. For standard equity options, the quoted premium is multiplied by 100. If an option is priced at $2.00, one contract generally costs $200.
Options premiums can change quickly because several factors affect their value. The price of the underlying stock, strike price, time until expiration, and implied volatility all play a role.
This is why being right about the direction of a stock does not always mean the option will be profitable. The stock may move too slowly, implied volatility may fall, or time decay may reduce the value of the contract.
Before trading an option, don’t just look at the premium itself. Check the strike price, expiration date, implied volatility, liquidity, and how much time the trade has to work. You don’t want to choose an option simply because the premium looks cheap. A low-priced contract may be far out of the money, close to expiration, or trading with poor liquidity.
How to Read an Options Chain
An options chain shows the available contracts for an underlying security. The example above uses SPY, a heavily traded ETF that tracks the S&P 500.
The expiration dates are listed first. After selecting an expiration, you’ll see the available strike prices with calls on one side and puts on the other. Depending on your broker, the options chain may also show the bid and ask, last price, volume, open interest, implied volatility, and other contract data.
Expiration schedules vary by security. Some actively traded securities have multiple expirations each week, while others may have weekly or monthly expirations. Not every stock has options available.
Pay attention to liquidity when reviewing an options chain. Volume, open interest, and the bid-ask spread can help you evaluate how actively a contract is trading. A wide bid-ask spread can make it more difficult to enter and exit a position at the price you want.
Strike Prices
The strike price is the price at which the underlying security can be bought or sold if an option is exercised. Strike price also helps determine whether an option is in the money, at the money, or out of the money.
Using the SPY options grid above, SPY was trading at $333.53 when the screenshot was taken. A $333 call was in the money because the stock price was above the $333 strike. A $334 put was also in the money because the stock price was below the $334 strike.
For calls, strike prices below the current stock price are in the money. Strike prices above the current stock price are out of the money. For puts, the opposite is true.
You’ll commonly see in-the-money options abbreviated as ITM and out-of-the-money options as OTM. The strike closest to the current price of the underlying security is generally considered ATM.
Our strike price guide goes deeper into how strike selection works and why it matters when choosing an options contract.
Intrinsic vs. Extrinsic Value
An options premium can contain intrinsic value, extrinsic value, or both. Understanding the difference helps explain why two contracts on the same stock can trade at very different prices.
Intrinsic value is the amount an option is in the money. For example, if a stock is trading at $11 and you own a $10 strike call, the option has $1 of intrinsic value per share, or $100 for a standard contract.
If that same call is trading for a $1.50 premium, $1 is intrinsic value and the remaining $0.50 is extrinsic value.
Extrinsic value is the portion of an option’s premium above its intrinsic value. Time remaining until expiration and implied volatility are important factors that affect it.
An out-of-the-money option doesn’t have any intrinsic value. Before expiration, however, it can still have extrinsic value. If the contract remains out of the money at expiration, it generally expires worthless.
Breaking Even
The break-even price tells you where the underlying security would need to be at expiration for the option buyer to recover the premium paid, excluding fees and other costs.
For a call, the expiration break-even price is the strike price plus the premium paid. If you buy a $10 strike call for a $0.50 premium, the expiration break-even price is $10.50.
For a put, the expiration break-even price is the strike price minus the premium paid.
Break-even at expiration does not mean the underlying security must reach that price before you can close an options trade for a profit. Before expiration, changes in the underlying price, time remaining, and volatility can all affect the contract’s market value.
Speculation and Hedging
Options can be used for both speculation and hedging. The difference comes down to what you are trying to accomplish with the position.
When speculating, a trader takes a position based on an expected price move. For example, you might buy a call if you expect a stock to rise or buy a put if you expect it to fall.
Options provide leverage because a standard equity options contract typically represents 100 shares, while the premium may cost considerably less than purchasing 100 shares outright. That leverage also increases risk. If the trade moves against you, volatility changes, or the move takes too long, the contract can lose value. An option buyer can lose the entire premium paid.
Options can also be used to hedge an existing position. For example, an investor who owns shares of a stock may buy a put to help protect against a decline in the stock price. The investor pays a premium for that protection, similar to paying for insurance.
Whether you use options for speculation or hedging, know exactly what role the option is playing in the position. A speculative trade is trying to profit from a move, while a hedge is being used to reduce or offset another risk.
Before entering, consider how much you can lose, how much time remains until expiration, what could happen to implied volatility, and what the underlying security needs to do for the trade to work.
What Are Options Greeks?
The options Greeks measure how different factors can affect the price of an options contract. The main Greeks traders should understand are Delta, Gamma, Theta, and Vega.
Delta estimates how much an option’s premium may change when the underlying security moves by $1. Calls generally have positive Delta, while puts generally have negative Delta. Delta can also help traders understand how sensitive a contract is to changes in the underlying price.
Gamma measures how much Delta may change when the underlying security moves by $1. Gamma helps show how quickly an option’s price sensitivity can change as the stock moves.
Theta measures the effect of time decay on an option. As expiration approaches, an option can lose extrinsic value simply because there is less time remaining for the trade to work. Theta is especially important for traders buying short-dated options.
Vega measures how sensitive an option’s premium is when there are changes in implied volatility. When implied volatility rises, options premiums can increase. When implied volatility falls, premiums can decrease, assuming other factors remain the same.
The Greeks work together that way we don’t look at one number in isolation. Understanding them can help you compare contracts, choose expiration dates and strike prices, and see why an option gained or lost value even when the underlying stock moved in the direction you expected.
Read our options Greeks guide for a deeper look at Delta, Gamma, Theta, Vega, and how they affect options contracts.
Options Trading Strategies
There are many options trading strategies, ranging from buying a single call or put to combining multiple contracts in a spread. The strategy you choose should match your market outlook, risk tolerance, and the amount of time you expect the trade to take.
Buying calls and puts is one of the simplest approaches. Traders can also use strategies such as vertical spreads, straddles, strangles, covered calls, and other combinations of options contracts.
Each strategy has a different risk and reward profile. Some are directional, while others focus on volatility, time decay, income, or hedging an existing position.
Before trading any options strategy, you need to understand the maximum potential loss, maximum potential profit, break-even point, expiration date, and how changes in volatility and time can affect the position.
Vertical Spreads
Vertical spreads combine two options that are the same type and have the same expiration date but have different strike prices Traders use them to define risk and structure a position around a bullish or bearish outlook.
A vertical spread can be built with calls or puts. Because one contract helps offset the cost or risk of the other, the potential profit and loss are generally defined when the trade is opened.
Debit spreads require a net premium to enter the trade. A bull call spread can be used for a bullish outlook, while a bear put spread can be used for a bearish outlook. The option you sell helps reduce the cost of the option you buy, but it also limits the potential profit.
Credit spreads generate a net premium when the position is opened. A bull put spread can be used for a bullish outlook, while a bear call spread can be used for a bearish outlook. The goal is generally for the spread to lose value so the trader can keep some or all of the credit received.
Spreads can make risk easier to define. But they still require a good strike selection, expiration selection, and trade management. Before entering one, know the maximum potential profit, maximum potential loss, and break-even price.
Our vertical spreads guide goes deeper into how these strategies are structured and managed.
Straddles and Strangles
Straddles and strangles are options strategies that use both a call and a put on the same underlying security. Traders may use them when they expect a significant price move but are less certain about the direction.
A long straddle involves buying a call and a put with the same strike price and expiration date. The trade can benefit from a large move in either direction, but the move needs to be large enough to overcome the cost of both premiums.
A long strangle also involves buying a call and a put with the same expiration date, but the contracts will have different strike prices. The call strike is usually above the current stock price, while the put strike is below it.
Strangles can cost less than comparable straddles because both options are typically out of the money when the trade is opened. However, the underlying security generally needs to make a larger move for the position to become profitable.
Implied volatility and time decay are important with both strategies. Buying two options means paying two premiums, and both contracts can lose value as expiration approaches. Changes in implied volatility can also have a significant effect on the value of the position.
These strategies are sometimes considered around events that could produce a large price move, but an expected increase in volatility may already be reflected in the options premiums. Always look at the cost of the position and the amount of movement needed before entering the trade.
Learn more about how these strategies differ in our straddle vs. strangle guide.
Selling Options
Selling options is different from buying calls and puts. Instead of paying a premium for a contract, the option seller collects the premium and takes on the obligations associated with that contract.
When you sell a call, you may be obligated to sell shares at the strike price if the option is exercised. When you sell a put, you may be obligated to buy shares at the strike price.
Time decay can work in favor of an option seller because options generally lose extrinsic value as expiration approaches. However, collecting premium does not make selling options low risk. The amount of risk depends heavily on the strategy.
For example, a covered call is backed by shares of the underlying stock. But a naked call can have unlimited risk if the stock price continues to go up. Defined-risk spreads can limit potential losses by combining a short option with another option for protection.
The premium collected should never be viewed as guaranteed income. Before selling options, you need to understand assignment risk, buying power requirements, expiration, and the maximum potential loss of the position.
Our selling options guide covers how option selling works and the risks traders should understand before using these strategies.
Options Trading Rules
Options give traders flexibility, but they also add expiration, time decay, volatility, and leverage to a trade. Having a few basic rules can help you avoid some of the mistakes newer options traders make.
Know your maximum risk before entering a trade. So you should understand how much the position can lose and whether that amount fits your trading plan. Defined risk does not mean low risk if the potential loss is too large for your account.
Give the trade enough time. Options lose time value as expiration approaches. Buying a contract with very little time remaining can leave you with less room for the setup to develop.
Do not choose a contract just because it is cheap. Far out-of-the-money options can have low premiums, but the underlying security may need to make a significant move before expiration for the trade to work.
Check liquidity before entering. Look at volume, open interest, and the bid-ask spread. A contract with poor liquidity can make it harder and more expensive to enter or exit a position.
Have an exit plan before placing the trade. Know where you will take a loss, where you may take profits, and what would invalidate the setup.
We review options setups and risk management in real market conditions inside our trade rooms. The goal is not to follow someone else into a trade. It is to see how setups, entries, exits, and risk are analyzed as the market develops.
Don’t let the fact that an option can go to zero convince you to hold it just because you have already lost most of the premium. If the setup is invalidated, the trade can still be wrong even if there is time remaining before expiration.
Illiquid Options Trading
Liquidity is important when trading options because it affects how easily you can enter and exit a position. Before entering an options trade, check the contract’s volume, open interest, bid, ask, and bid-ask spread.
A wide bid-ask spread can make it harder to get filled near the price you want. Market orders can be especially risky with illiquid options because the next available price may be significantly different from what you expected.
We prefer using limit orders because they give you more control over the price you are willing to pay or receive. A limit order does not guarantee a fill, but it can help prevent an unexpected execution price.
Liquidity can also vary between strike prices and expiration dates on the same stock. A good chart setup does not automatically make the options contract a good trade, so always check the options chain and liquidity before placing your order.
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Frequently Asked Questions
The best way to learn options trading is to start with the contract itself. Learn calls, puts, strike prices, expiration dates, premiums, and how much money is actually at risk. Then move into intrinsic and extrinsic value, implied volatility, the Greeks, and spreads. Take an options trading course, use a paper trading account, and watch how different contracts behave as the underlying stock moves before risking real money.
Options aren’t always better than stocks. They’re different, with different risks and uses. Options can provide leverage and don’t need as much capital as buying 100 shares of the underlying stock, but they also have expiration dates and are affected by time decay and implied volatility. Stocks may be simpler for traders and investors who want direct ownership without an expiration date. Which one makes more sense depends on your strategy, experience, risk tolerance, and what you are trying to accomplish.
Beginners can learn to trade options, but should understand how the contract works before risking real money. Options have strike prices and expiration dates, and their value can change because of time decay, implied volatility, liquidity, and movement in the underlying security. Start with calls and puts, learn how premiums work, know the maximum risk of the position, and practice in a paper trading account before increasing your exposure.
