Getting started with options

Since you’ve stumbled across this article, there’s a good chance you’ve heard about options trading (sometimes called equity options, or options, for short), and an even better chance that you’ve been told they’re risky, complex financial instruments better left to professional traders. It’s also a near certainty that someone, somewhere has told you about how much money they’ve made, or lost, trading options. With opinions everywhere, it’s worth getting back to basics, so let’s start there.

Before the ‘what’, here’s the ‘why’

For all you may have heard, a large part of the risk in trading options (or any financial product) lies with the trader. Options can be confusing if you don’t have much experience with them and it can be difficult to learn how they work. But, here’s the thing - for all their nuances, options are essentially contracts that can be bought and sold.

In fact, options were created as a way to help protect large portfolios or stock positions against collapses in the markets, not to speculate. It was a simple way of transferring a lot of the risk of holding a stock onto someone else, without compromising much of the stock’s existing profit or upside potential.

Today, the three most common uses for options are speculation, income and protection. Let’s break these down.

• Speculation. If you think you know where the market might be going next, you could buy call and put options (“calls” and “puts”) at a fraction of the stock price. Keep in mind, there’s a lot more to trading options than these two strategies, which we’ll cover in another article.
• Income. Believe it or not, there are ways to sell options to "collect income" from a stock you already own (or even other options you own). The idea of first “selling high” and then “buying low” might be foreign to you if you’re just starting out but it exists.
• Protection. Sometimes you might just need to “head for the exit” and sell a stock you own. Other times, you might set yourself up with a way to help protect your investment before something happens, sort of like how we protect our homes and cars with insurance.

Perhaps the biggest myth is that options are all just high-risk, short-term vices for adrenaline junkies. While there are very short-term options that can expire in as little as a week (more risky), there are also options that expire in nearly three years (not as risky). So, while there’s certainly an appeal for short-term day traders, options can also play nice with long-term investors looking for thoughtful ways to hedge (trader-speak for helping protect against) market risk or even potentially enhance returns.

Our goal isn’t to preach that one way to trade options is better than another (we couldn’t even if we wanted to). We want to empower you with information to help you find your comfort zone and help you discover what works best for you. If options aren’t your cup of tea, that’s OK too.

Ultimately, options can be a powerful financial tool. And with great power comes great responsibility (thanks Spidey). While we can’t promise that learning about options will make you a successful trader, it can help you become a more aware trader.

Ready to start?

Good. So are we.

Let’s start at the beginning…

Important information

When you invest your capital is at risk. Past performance is not a reliable guide to future gains. Your investments and the income you receive from them may go down as well as up so you may get back less than you invest.

Make sure to do your own research on what investments are right for you before investing or consider seeking expert financial advice. Please note that this article is meant for information purposes only and does not constitute financial advice.

We don't charge commission fees when you buy or sell stocks but other costs apply. See our fee schedule.

Options are complex products, involve significant risk and are not suitable for all investors. You could lose more than your initial invested capital. You should only invest in financial products that match your knowledge and experience. Please review Characteristics and Risks of Standardized Options prior to engaging in options trading.