How to Start Trading Options
How to Start Trading Options
Wondering where to begin? Which broker do you use? Which direction will a stock move? How do you buy or sell? Let us help you answer these questions.
2. Open an options trading account
This step may seem obvious, but before you can start trading options, you will have to find a platform tailored to your needs. Given the complexity of predicting multiple moving parts such as price action, bid/ask, charting, etc. Specific brokers do specific things quite well. These details will be important once you become familiar with options trading and when you feel more confident in executing.
Insider tip: Interactive Brokers offers instant cash settlement and has no good faith violation for a cash account. IBKR is also the only international brokerage with unlimited day trades. Think or Swim with TD Ameritrade is great for charting.
2. Pick which options to buy and sell
First, you have to know what is an option. A call option is a contract that gives you the right to buy a stock at a predetermined price (called a strike price) within a certain period. A put option gives you the right to sell shares at a stated price before the contract expires.
Which direction you might think the underlying stock to move determines what type of options contract you might take on.
Stock goes up = buy a call option
Stock goes down = buy a put option
This is a very basic overview of what options are. To learn more about options, check out or co-founders Introduction to Trading SPY.
Insider tip: Always trade with a plan! Do you plan on scalping or are you day trading? Be ready to use proper risk management at all times.
3. Predict the option strike price
You can’t just choose any strike price. An option chain contains a range of available strike prices in increments between prices that are standardized across the industry – for example $1, $2.50, $5, $10, etc. You’ll want to buy an option with a strike price that reflects where you predict the stock will be during an option’s lifetime. The price you pay for an option, called the premium, has two components: intrinsic value and time value. Intrinsic value is the difference between the strike price and the share price, if the stock price is above the strike. Time value is whatever is left, and factors in how volatile the stock is, the time to expiration and interest rates, among other elements. This will help you determine how long or short you hold onto an options contract.
4. Determine the option time frame
Every options contract has an expiration period that indicates what day it expires. Expiration dates can range from days, weeks, to quarters or years. The longer the expiration, the more time for your investment thesis to play out. If a trade has gone against you, you can still sell any time value remaining on the option. This is why having a plan is important. To learn more about scalping, day trading, or swings sign up for a mentorship with one of our moderators by signing up for Rippy Global.
Why trade options?
Once you have learned strategies and are willing to take some risks, you can generate another stream of income. Consistency is key and if you are willing to put in the time and effort, there are endless opportunities for you to make money from trading options. Learn more about trading options and sign up for our 7 day trial subscription.