How Do I Start Trading Options: The Complete Beginner’s Roadmap

Are you looking to expand your investing horizons beyond just buying and selling stocks? Options trading might be your next frontier! I’ve spent countless hours researching and trying out different strategies, and I’m excited to share what I’ve learned about getting started with options trading.

Options trading can seem intimidating at first (trust me, I was confused too!), but with the right approach, it’s something you can definitely learn Let’s break down everything you need to know to begin your options trading journey

What Are Options Anyway?

Before diving into how to start trading, let’s clarify what options actually are:

Options are contracts that give you the right—but not the obligation—to buy or sell a stock at a specific price (called the strike price) by a certain date in the future. Each contract typically represents 100 shares of the underlying stock.

There are two basic types of options:

• Call options: Give you the right to buy a stock at the strike price
• Put options: Give you the right to sell a stock at the strike price

The 4-Step Process to Start Trading Options

Step 1: Open an Options Trading Account

Unlike regular stock trading options trading requires additional approval from your broker. This is actually for your own protection since options can be more complex and risky.

Here’s what you’ll need to provide to your broker:

• Investment objectives: Income, growth, capital preservation, or speculation
• Trading experience: Your knowledge level, how long you’ve been trading, number of trades per year
• Financial information: Your liquid net worth, annual income, total net worth, employment info
• Options strategies: What types of options you want to trade (calls, puts, spreads, etc.)

Based on your answers, your broker will assign you a trading level (typically 1-5, with 1 being lowest risk and 5 being highest). This determines what kinds of options strategies you’re allowed to use.

Pro Tip: Try paper trading (practice trading with fake money) before risking real cash. Many brokers offer free paper trading accounts for practicing.

Step 2: Decide Which Options to Trade (Calls or Puts)

Now comes the fun part – deciding which direction you think a stock will move:

• If you think a stock price will go up: Buy a call option or sell a put option
• If you think a stock price will stay stable: Sell a call option or sell a put option
• If you think a stock price will go down: Buy a put option or sell a call option

Randy Frederick, former managing director at Schwab Center for Financial Research, suggests thinking of options like insurance: “You buy options hoping you don’t need them,” he says. They’re a way to protect your investments or capitalize on market movements with limited risk.

Step 3: Choose the Strike Price

The strike price is the price at which you can exercise your option. When selecting a strike price, you’re essentially making a prediction about where the stock price will be during the option’s lifetime.

For a call option to be profitable (or “in the money”), the stock price needs to rise above the strike price. For a put option to be profitable, the stock needs to fall below the strike price.

You can’t just pick any price – options are available at standardized strike price increments (like $1, $2.50, $5, or $10), based on the current stock price.

Step 4: Select an Expiration Date

Every option has an expiration date – the last day you can exercise your option. Expiration dates can range from days to years:

• Short-term options (daily or weekly): Higher risk, for experienced traders
• Medium-term options (monthly): More balanced risk/reward
• Long-term options (yearly, or LEAPS): Lower risk, more time for your investment thesis to play out

Remember that options lose value as they approach expiration (called “time decay”), so longer expiration periods give you more time for your prediction to come true. However, options with longer expirations cost more money upfront.

Let’s See Some Real Examples

Example 1: Buying a Call Option

Imagine XYZ Corp is trading at $100 per share. You believe the price will rise to $120 in the next few months.

You could buy a call option with:

• Strike price: $110
• Expiration: 3 months out
• Premium (cost): $5 per share ($500 total for one contract)

If XYZ rises above $115 (strike price + premium), you start making money. If it stays below $110, your option expires worthless, and you lose your $500 investment.

Example 2: Buying a Put Option

Now imagine you think XYZ Corp (still at $100) will fall to $80.

You could buy a put option with:

• Strike price: $90
• Expiration: 3 months out
• Premium: $4 per share ($400 total)

If XYZ falls below $86 (strike price – premium), you profit. If it stays above $90, your option expires worthless, and you lose your $400 investment.

Common Questions Beginners Have

How much money do I need to start?

The amount varies based on your broker and the strategies you want to use. But generally, you’ll need:

• For buying options: The premium cost (often $100-$1,000 per contract)
• For selling options: Potentially much more, as some strategies require margin accounts

Is options trading risky?

Yes, options can be risky—especially certain strategies. As Wendy Moyers, a certified financial planner at Chevy Chase Trust puts it: “The pros are you could make a little bit extra money on investing in the short term. The con is you could lose everything, depending on how you structure your options trading.”

That said, some options strategies are specifically designed to reduce risk in your portfolio.

What’s the best broker for options trading?

Look for brokers with:

• Low per-contract fees
• Good educational resources
• User-friendly options chain display
• Helpful analysis tools

Some of the most popular options brokers include Charles Schwab, Public, and TD Ameritrade (now part of Schwab).

Real Talk: My Personal Experience with Options

When I first started trading options, I made a classic beginner mistake. I bought puts on S&P 500 ETFs thinking “what goes up must come down.” The platform showed me exciting potential profits, so I jumped in without fully understanding time decay.

What I didn’t anticipate was how hard it would be to time market volatility correctly. The S&P 500 did rise and fall, but I either bought puts with the wrong expiration dates or didn’t sell at the right time. Eventually, my options expired worthless and I lost my premiums.

This isn’t meant to discourage you – it’s just a reminder that there’s a learning curve. I wish I’d spent more time with a paper trading simulator before using real money. If you’re like me and prefer enjoying life rather than being glued to a screen all day, consider a more diversified, hands-off strategy for most of your portfolio.

Essential Options Trading Terminology

Before you start, familiarize yourself with these key terms:

Tips for Options Trading Success

• Start slow: Begin with simple strategies like buying calls or puts
• Limit your investment: Only use money you can afford to lose completely
• Use paper trading first: Practice with fake money before risking real capital
• Understand the greeks: Delta, gamma, theta, and vega help you understand how option prices move
• Have an exit strategy: Know when you’ll take profits or cut losses
• Start with longer expirations: Gives you more time for your thesis to play out
• Consider implied volatility: High volatility means more expensive options

Final Thoughts

Options trading isn’t for everyone. It requires more time, research, and active management than simple buy-and-hold investing. But for those willing to put in the effort, options can provide unique opportunities to generate income, leverage investments, or protect your portfolio.

Just remember what Frederick says about using options wisely: “You can use options to speculate and to gamble, but the reality is… the best use of options is to protect your downside.”

Ready to start? Open an account with a reputable broker that offers good educational resources, spend time learning the basics, practice with paper trading, and only then begin with real money—starting small and simple.

Happy trading!