Beginner's Guide to Options Trading

• Call options give you the right, but not the obligation, to buy a stock at a predetermined "strike" price before the expiration date. You pay a premium for this right.
• Your goal is for the stock price to rise above the strike price + premium paid so you can buy low, and sell high. The more it rises, the more profit potential.
• Strike prices are fixed prices you can buy at. Lower strike = higher premium since it's more likely to be hit. Farther expiration dates also raise premiums.
• You lose the entire premium paid if the stock stays below the strike price at expiration. So buy enough time for a price rise and manage risks.
• Options trade in blocks of 100 shares. So an $0.80 premium actually costs $80 per contract. Manage position sizing and risk accordingly.

Options trading can be highly profitable when done correctly, but also carries risks, especially for beginners. This guide explains call options from an investor's perspective, walking through key concepts and actionable tips to trade options successfully as a beginner.

How Call Options Work

A call option gives you the right, but not the obligation, to buy a stock at a predetermined "strike" price before a set expiration date. For this right, you pay a premium fee to the seller upfront.

If the stock price rises above the strike price + premium paid, you can exercise the option to buy shares at the lower strike price, and then immediately sell them at the market price for a profit. The higher above the strike price the market price goes, the more potential profit.

However, if the stock stays below the strike price by expiration, the option is worthless since you could just buy shares cheaper on the open market. In this case, you lose the entire premium paid for no profit.

Key Factors That Determine Option Prices

Strike Price - This is the fixed price you can buy shares at with the option. Lower strike prices have higher premiums since it's more likely the stock will reach that price. Higher strike prices have lower premiums since it's less probable the stock will rise that high by expiration.

Expiration Date - A longer time until expiration means higher premiums, as there's more time for the stock to potentially rise above the strike price. Options expiring very soon will have lower premiums.

Volatility - Stocks that fluctuate wildly command higher premiums, as there's a greater chance of a price spike above the strike price. Stable stocks have lower volatility and cheaper option premiums.

Maximizing Profits and Managing Risks

To maximize potential gains, choose strike prices just above the current market price, and longer expiration dates. This provides enough time for profits while minimizing the premium spent. Monitor the stock closely as you approach expiration and be ready to sell at a profit.

To limit the downside, only allocate a small percentage of your portfolio to options trading when starting out. Smaller positions mean lower premium outlays and reduce the loss if options expire worthless. Also, diversify across multiple options contracts on various stocks. Avoid very short expiration dates and high-risk stocks when beginning.

Contract Specifications

Options trade in standardized contracts representing 100 shares per contract. So if you see a premium quoted at $0.80, that is per share. Since each contract covers 100 shares, you'd pay $80 total for a full contract at that premium price.

When first starting out, trade only 1 contract at a time to keep position sizing small and manageable. As you gain experience, you can increase your options for contract positions to pursue higher potential gains.

In Summary

With the right strategy, options trading offers leveraged profit potential on stocks. Follow the guidance in this guide to minimize risks and trade options successfully as a beginner. Monitor your positions closely, manage your trade sizing, and avoid overextending yourself while learning the basics. With experience over time, you can become a skilled options trader.