Understanding options

While some options strategies can be complicated, the ones that make sense for most investors are often relatively straightforward.

Simple options strategies can potentially help you:

• Hedge against risk or generate income.
• Speculate with bullish, bearish, and neutral strategies.
• Develop strategies based on time, volatility, or interest rates.
• Lower your breakeven point.

Calls
A call option gives the contract owner/holder (the buyer of the call option) the right to buy the underlying stock at a specified price by the expiration date Tooltip The date at which an option no longer trades and has expired. All options eventually cease to exist and have an expiration date. . Calls are typically purchased when you expect that the price of the underlying stock may go up.

Puts
A put option gives the contract owner/holder (the buyer of the put option) the right to sell the underlying stock at a specified price by the expiration date. Puts are typically bought when you expect that the price of the underlying stock may go down.

2. Search for options ideas.

Now that you've identified your primary objective, what other characteristics of an option or underlying security are you looking for? Filtering the field based on price, volume Tooltip Volume can refer to the number of shares traded in a security, or the number of options contracts traded, over a period of time. , implied volatility Tooltip Implied Volatility (IV) is a forward looking measure of the market's expectation for the underlying stock's expected move up or down and is represented as annualized percentage. Traders tend to compare Implied Volatility to historical volatility of a stock to determine if the current Implied Volatility is either relatively high or low. , sector, or other parameters can narrow the universe of trades down to a manageable set of ideas. 

3. Analyze and compare ideas. 

Once you've found a few options trade ideas, it's time to compare them. You can start by analyzing each option's potential risk or reward, as well as how its price may be impacted by factors like changes in the underlying stock price, days to expiration, different strike prices Tooltip The potential transaction price of the underlying security should an exercise or assignment take place. and expiration dates Tooltip The date at which an option no longer trades and has expired. All options eventually cease to exist and have an expiration date. , and implied volatility Tooltip Implied Volatility (IV) is a forward looking measure of the market's expectation for the underlying stock's expected move up or down and is represented as annualized percentage. Traders tend to compare Implied Volatility to historical volatility of a stock to determine if the current Implied Volatility is either relatively high or low. .

4. Place your options trade. 

The next step is to establish your option position by submitting an order for execution through your online broker. Choose the underlying symbol, then enter the specific option order details (price, number of contracts, opening/closing, etc.). Once your order is submitted, it will be routed to the market.