What Is Options Trading?

Curious about options? This story will take a look at the very basics of options trading. 

Options vs Stocks: What's the Difference?

The best way to start learning about options is by comparing them to stocks. Let's get started!

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Stocks

1. Represents ownership; voting rights and dividends

2. Stocks never expire

3. No leverage

4. One share = one unit

5. Medium to high risk

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Options

1. Do not represent ownership; no dividends

2. All options expire

3. High leverage

4. One contract = 100 shares

5. Generally high risk

All Options Are Either Calls or Puts

Long call options are bullish bets

Long put options are bearish bets

What Do Options Represent?

Calls options represent long stock and put options represent short stock

Call Option Visualized

The below graph shows the profit/loss profile of a long call option at expiration. 

Put Option Visualized

The below graph shows the profit/loss profile of a long put option at expiration. 

Is Buying Options Profitable?

Options are decaying assets. With each passing day, they shed value if the underlying does not change. 

If Options Buyers Tend To Lose Money, Do Option Sellers Make Money?

Does selling options make more sense than buying options?

Selling Options Naked is Incredibly Risky!

So just how risky is this strategy?

Selling naked call options has unlimited loss potential! Selling puts is also high risk.

Buying + Selling options at the same time = Spread Trading

➥Buy 1 Call (a) ➥Sell 1 Call (b)

You can also use this risk reduction strategy with puts!

Want to Learn More About Options Trading?

For an in-depth options trading education, check our our guide below!