Hey there, options curious traders! Today I’m gonna tackle one of the most common questions I get from beginners looking to dip their toes into the exciting (and sometimes confusing) world of options trading: Do you have to buy 100 shares of stock when trading options?
The short answer is no, you don’t need to own or purchase 100 shares of the underlying stock to trade options. But there’s a lot more nuance to understand especially if you wanna avoid some potentially costly mistakes.
Understanding the Basics of Options Contracts
Before we dive deeper, let’s make sure we’re on the same page about what options actually are
An options contract gives you the right (but not the obligation) to buy or sell an underlying asset at a specified price (strike price) before a certain date (expiration date). Standard stock options contracts in the U.S. typically represent 100 shares of the underlying stock.
There are two main types of options:
- Call options – Give you the right to BUY shares at the strike price
- Put options – Give you the right to SELL shares at the strike price
Buying Options vs. Exercising Options
This is where the confusion usually starts. When people ask if they need 100 shares to trade options, they’re mixing up two different concepts:
- Buying/selling option contracts – Trading the option itself
- Exercising an option – Converting the option into a transaction of the actual underlying shares
Let me break this down with some real talk.
Trading Options Without Owning Shares
When you BUY a call or put option, you’re simply purchasing the contract itself. You don’t need to own any shares of the underlying stock. The cost of buying the option is just the premium (the price of the option) multiplied by 100 (since each contract represents 100 shares).
For example, if Apple (AAPL) options are trading at a premium of $3.50 per contract, you’d pay $350 to buy one contract ($3.50 × 100 = $350) plus any commission or fees.
Most traders actually never exercise their options! Instead, they sell the contract before expiration to realize a profit (or loss) based on changes in the premium price.
What About When You Sell Options?
Things get a bit more complicated when you SELL options (taking the writer position).
If you sell a covered call, you DO need to own 100 shares per contract you’re selling. This is considered a relatively safe strategy because if the option is exercised, you already have the shares to deliver.
If you sell options without owning the underlying shares (naked options), you’re entering more risky territory. Brokerages typically require significant margin requirements and approval for these advanced strategies because your potential losses could be substantial.
Do You Need Money for 100 Shares to Trade Options?
Another common question: Do you need enough money in your account to buy 100 shares if you’re trading options?
For buying options, no – you only need enough money to pay the premium.
For selling certain types of options (like naked calls or puts), your broker will typically require you to have a margin account with sufficient funds to cover potential obligations. This isn’t the same as needing money for 100 shares upfront, but it’s a way for brokers to manage risk.
Popular Options Trading Strategies That Don’t Require Owning Shares
Here are some common strategies that don’t require you to own the underlying stock:
- Long Calls – Buying call options when you expect the stock price to rise
- Long Puts – Buying put options when you expect the stock price to fall
- Debit Spreads – Buying and selling options of the same type but different strike prices
- Credit Spreads – Similar to debit spreads but with different risk/reward profiles
- Iron Condors – A market-neutral strategy betting that a stock will stay within a certain range
What Happens at Expiration?
This is where things can get tricky. If you hold options through expiration, different scenarios can play out:
For Options You’ve Bought:
- Out-of-the-money options – These expire worthless. You lose your premium, but that’s it.
- In-the-money options – These have value at expiration. Most brokers will automatically exercise them for you if you have the necessary funds/shares. If you don’t, your broker might:
- Sell the options before market close on expiration day
- Attempt to exercise and then immediately sell the resulting position (in a cash account)
- Exercise the option if you have sufficient margin (in a margin account)
For Options You’ve Sold:
If you sold options that expire in-the-money, you may be assigned. This means you’re obligated to fulfill the contract terms:
- For sold calls, you must deliver 100 shares per contract at the strike price
- For sold puts, you must buy 100 shares per contract at the strike price
If you don’t have the shares or funds to meet these obligations, your broker will usually take action on your behalf, which could include buying/selling shares at market prices or using margin. This can sometimes result in unexpected fees or losses.
Real-Life Example: Trading Call Options Without Owning Shares
Let’s say you think Amazon (AMZN) stock currently trading at $3,300 is going to go up in the next month. You don’t have enough money to buy even one share, let alone 100!
Instead, you buy one call option with a strike price of $3,400 expiring in one month for a premium of $50 per share, or $5,000 total for the contract ($50 × 100 = $5,000).
Scenario 1: Amazon rises to $3,600 before expiration. Your option is now worth at least $200 per share ($3,600 – $3,400), or $20,000 for the contract. You can sell the option and make a $15,000 profit without ever owning a single share of Amazon!
Scenario 2: Amazon only rises to $3,350. Your option would expire worthless because it’s still below the strike price. You lose your $5,000 premium.
What About Robinhood and Other Popular Trading Platforms?
Platforms like Robinhood, Webull, and others do allow options trading without requiring you to own the underlying stock. However, they have different requirements and approval processes:
- Robinhood offers options trading at different levels. Basic options strategies (like buying calls/puts) are available to most users, while more advanced strategies require more experience and/or account equity.
- Webull has similar tiered options approval.
- TD Ameritrade/thinkorswim has more stringent requirements but offers more comprehensive tools.
- E*TRADE and Charles Schwab offer options trading with various approval levels based on experience and account size.
Most platforms will not allow you to hold options through expiration if you don’t have the funds or shares to fulfill the potential obligation.
Risks and Considerations
Trading options without owning the underlying shares isn’t necessarily more risky than owning shares, but it does present different risks:
- Time decay – Options lose value as they approach expiration (especially noticeable in the final 30 days)
- Implied volatility changes – Can drastically affect option prices independently of stock movement
- Limited timeframe – Unlike stocks which you can hold indefinitely, options have an expiration date
- Leverage effect – Options provide leverage which can magnify both gains and losses
Common Mistakes to Avoid
- Not understanding assignment risk – If you sell options, you could be assigned at any time before expiration
- Holding too close to expiration – Time decay accelerates as expiration approaches
- Using too much of your portfolio on options – Due to their all-or-nothing nature, position sizing is critical
- Ignoring implied volatility – High IV options are more expensive and face more potential for price collapse
- Trading illiquid options – Wide bid-ask spreads can make it difficult to enter and exit positions profitably
Final Thoughts: To Own or Not to Own?
So, do you have to buy 100 shares of stock with options? Absolutely not. In fact, most options traders never deal with the underlying shares at all. They simply trade the options contracts themselves, buying and selling them based on price movements before expiration.
That said, there are some strategies (like covered calls or protective puts) that do require owning the underlying shares. These strategies serve different purposes and have different risk profiles.
The beauty of options is their flexibility—they can be used to speculate on price movements, generate income, hedge existing positions, or create defined risk strategies. Understanding when and why to use each approach is part of becoming a successful options trader.
Have you tried trading options without owning the underlying stock? What strategies have worked best for you? Drop me a comment below—I’d love to hear about your experiences!
How to Sell Options
Selling stock options does come with the obligation to sell the underlying equity to a buyer if that buyer decides to exercise the option and you are “assigned” the exercise obligation.
When you sell (or “write”) a Call – you are selling a buyer the right to purchase stock from you at a specified strike price for a specified period of time, regardless of how high the market price of the stock may climb.
Below are two popular call writing strategies:
In a covered call, you are selling the right to buy an equity that you own. If a buyer decides to exercise their option to buy the underlying equity, you are obligated to sell to them at the strike price. Sometimes an investor may buy an equity and simultaneously sell a call on the equity. This is referred to as a “buy-write.”
In an uncovered call, you are selling the right to buy an equity from you which you don’t actually own at the time. Uncovered call writing carries substantial risk if the equity’s price increases sharply.
Options aren’t right for every investor and are just right for others.
Options can be risky but can also provide substantial opportunities to profit for those who properly use this very flexible and powerful financial instrument.
Benefits of Trading Options
Orderly, Efficient and Liquid Markets
Standardized option contracts allow for orderly, efficient and liquid option markets.
Flexibility
Because of their unique risk/reward structure, options can be used in many combinations with other option contracts and/or other financial instruments to seek profits or protection.
Leverage
An equity option allows investors to fix the price for a specific period of time at which an investor can purchase or sell 100 shares of an equity for a premium (price), which is only a percentage of what one would pay to own the equity outright.
This allows option investors to leverage their investment power while increasing their potential reward from an equity’s price movements.
Limited Risk for Buyer
Unlike other investments where the risks may have no boundaries, options trading offers a defined risk to buyers. An option buyer absolutely cannot lose more than the price of the option, the premium. An uncovered option seller, on the other hand, may face unlimited risk.
In most cases, stock options contracts are for 100 shares of the underlying stock. You can have one contract or many, but fractional contracts are not traded.
An option contract is defined by the following elements:
- Type (Put or Call)
- Underlying security
- Unit of trade (number of shares)
- Strike price and expiration date.
All option contracts that are of the same type and style and cover the same underlying security are referred to as a class of options. All options of the same class that also have the same unit of trade at the same strike price and expiration date are referred to as an option series.
Option contracts fall into two categories – Calls and Puts. A Call represents the right of the holder to buy stock. A Put represents the right of the holder to sell stock.
The Expiration Process
At any given time, an option can be bought or sold with multiple expiration dates. The expiration date is the last day an option exists, and is the deadline by which brokerage firms must submit exercise notices.
The seller of a Call option is obligated to sell the underlying security if the Call buyer exercises his or her option to buy on or before the option expiration date.
The seller of a Put option is obligated to buy the underlying security if the Put buyer exercises his or her option to sell on or before the option expiration date.
Exercising the Option…
… means buying or selling the underlying shares that are associated with their options. Options investors don’t have to do this – they can simply opt to resell their options.
Do You Need To Own 100 Shares Of Stock Before Trading Options? [Episode 363]
FAQ
How many shares of a stock do you need to sell options?
What is the 60/40 rule for options?
Non-equity options taxation
60% of the gain or loss is taxed at the long-term capital tax rates. 40% of the gain or loss is taxed at the short-term capital tax rates.
Can I buy only one share of stock?
Do equity option contracts always cover 100 shares?
The standard number of shares covered by one option contract on ASX is 100. However, this may change due to adjustment events such as a new issue or a reorganisation of capital in the underlying share.