For many beginners, options trading sounds like a high-stakes gamble. While it is true that options come with complexity and risk, they also offer powerful tools for amplifying returns, hedging portfolios, generating income, and managing risk, if approached with research and discipline. Far from being a speculative guessing game, options can be a strategic layer in a well-rounded investment plan. This article breaks down the essential concepts to guide you through the setup process by outlining basic strategies, emphasizing crucial risk management principles, and is a guide on how to trade options.

Options 101: Understanding the Basics

An option is a financial contract that gives the buyer the right, but not the obligation, to buy or sell an asset, usually a stock, at a predetermined strike price, on or before a specific expiration date. The seller, or writer, of the option must fulfill the contract if the buyer chooses to exercise it. In exchange for this right, the buyer pays a premium, which is the cost of the option. There are two fundamental types of options. These are:

• Call Option: Gives the buyer the right to buy a stock. A trader might buy a call if they are bullish, or expecting a price rise. Selling a call can be a way to generate income or express a neutral or bearish outlook.
• Put Option: Gives the buyer the right to sell a stock. A trader would buy a put if they are bearish or want to hedge a long position. Selling a put can be used to generate income if a trader is bullish or neutral.

Some important key terms that beginners must be aware of include:

• Underlying Asset: This refers to the stock or ETF the option is based on (e.g., AAPL, SPY).
• Strike Price: This is the agreed-upon price for buying or selling the asset.
• Expiration Date: This is the date the option expires.
• Premium: Premium is the price of the option contract, which is quoted per share, where one contract represents 100 shares.
• In-the-Money (ITM): This term is used when the option has intrinsic value.
• At-the-Money (ATM): This term is used when the option’s strike price is near the stock’s current price.
• Out-of-the-Money (OTM): This term is used when the option has no intrinsic value.

U.S. options are standardized and typically represent 100 shares of the underlying stock, making them accessible and highly liquid.

Setting Up for Success: Your First Steps

Before risking any capital, a beginning trader must commit time to learning, as education is paramount to finding success. They can refer to reputable resources like the Cboe Options Institute, Investopedia, and broker-sponsored tutorials. This can be crucial to understanding both the potential and the risks of putting capital at stake. Additionally, choosing the right brokerage account that supports options trading and is friendly to beginners will enable beginners to increase their potential for success. Look for intuitive platforms, strong customer service, educational tools, and beginner-friendly platforms with clear interfaces. Brokers like Public.com are popular among new traders, but before using these platforms, traders will need to apply for options trading approval, which comes in different levels, ranging from 1 to 4. Beginners can start with Level 1 or 2 to access basic, lower-risk strategies, and must also consider commission structures, especially per-contract fees, along with access to research and support. When it comes to funding an account, beginning traders are advised to start with an amount they are comfortable losing entirely. By only depositing risk capital, which is money that a trader is fully prepared to lose, a trader can maintain a level-headed approach. Most brokers offer simulated accounts, or paper trading, where traders can place trades using fake money. This enables traders to practice strategies without real money, which is a crucial step in building confidence and testing strategies before going live.

Your First Options Strategies: Simple & Lower Risk

As a beginner, focus on strategies with defined, limited risk. Here are three to start with:

• Long Call (Bullish View)- This strategy involves buying a call if you believe a stock will rise. For example, buying a 6-month AAPL $200 call for $5 or $500 total. The maximum risk would be the $500 premium paid, while the maximum reward would be limited. Traders can also break even with this strategy through the strike price ($200) and the premium ($5), which equals $205. A significant reason why beginners like it is that the risk is capped, and rewards can be significant.
• Long Put (Bearish View or Hedging)- This strategy involves buying a put if you expect a stock to fall or want to protect a stock you already own. For example, buy a 3-month TSLA $250 put for $8 ($800 total). The maximum risk with this strategy would be the $800 premium, while the maximum reward would be up to the strike price ($250 per share) if the stock drops to zero. Traders may also break even with the strike price ($250) minus the premium ($8), which equals $242. One of the main reasons why beginners like it is that it is great for hedging or speculating with defined risk.
• Covered Call (Income Strategy for Stock Owners) - This strategy involves a trader owning 100 shares of a stock and selling a call option against it to collect premium income. The risk with this strategy is that if the stock rises above the strike, the gains are capped, and the stock may be sold, but the reward is the premium and the stock gains up to the strike. Beginners like this strategy because it offers relatively lower risk since you already own the stock, and it generates extra income.

Essential Risk Management & Mindset for Beginners

Beginners on the initial parts of their journey in options trading must keep the following in mind:

• Only Risk What You Can Afford to Lose- Never trade with money you can’t afford to lose to preserve your peace of mind.
• Start Small- Trade just 1 or 2 contracts at first to keep trades manageable.
• Understand Time Decay (Theta)- Options lose value as expiration nears because time works against buyers and for sellers.
• Don’t Go All-In- Never stake everything on one trade; instead, diversify by spreading risk across different setups and ideas.
• Have an Exit Plan-

1. Profit Target: Know when you’ll cash out with a gain.
2. Stop Loss: Set a maximum acceptable loss before entering the trade.

• Avoid Naked Options- Do not sell options without owning the underlying stock, which is called naked selling, because the potential losses are unlimited. This kind of strategy requires higher approval levels and advanced experience.
• Control Emotions- Greed and fear can cloud judgment and lead to poor decisions. Stick to your plan and avoid revenge trading.
• Keep a Trading Journal- Document every trade, including entry, rationale, outcome, and lessons learned. This accelerates development and improves decision-making over time.

Next Steps & Continuous Learning

Starting your journey into U.S. options trading means mastering the basics, selecting the right tools, practicing simple strategies, and managing risk above all. Staying curious, continuous learning, and developing discipline and patience will enable you to build confidence and navigate options with expertise.