Options Trading Basics 2026: Calls, Puts, Greeks & Beginner Strategies

What Are Options?

An option is a contract that gives you the right—but not the obligation—to buy or sell an asset at a specific price before a specific date. You're paying for the opportunity, not the requirement.

Think of it like a deposit on a house. You pay $10,000 for the right to buy the house at $500,000 within the next 60 days. If the house goes up to $600,000, you exercise your option and profit. If it falls to $400,000, you walk away and lose only the $10,000 deposit.

That's essentially what an option is. The deposit is the "premium." The right to buy is a "call option."

Why Options Exist

Leverage: Control 100 shares for a fraction of the cost
Hedging: Protect against downside in stocks you own
Income: Sell options to collect premiums
Speculation: Bet on direction with limited capital at risk

Calls vs Puts Explained

There are two types of options:

Call Options

A call gives you the right to BUY at a set price.

You buy calls when you think the stock will go UP
Profit = (Stock price - Strike price - Premium) × 100
Maximum loss = Premium paid
Maximum gain = Unlimited (in theory)

Example: Stock trades at $100. You buy a $105 call for $3. If the stock goes to $120, your option is worth $15. You paid $3, so you profit $12 × 100 shares = $1,200.

Put Options

A put gives you the right to SELL at a set price.

You buy puts when you think the stock will go DOWN
Profit = (Strike price - Stock price - Premium) × 100
Maximum loss = Premium paid
Maximum gain = Strike price - Premium (if stock goes to $0)

Example: Stock trades at $100. You buy a $95 put for $2. If the stock crashes to $80, your option is worth $15. You paid $2, so you profit $13 × 100 shares = $1,300.

Quick Reference

If You Think...	You Might...
Stock will go up	Buy a call
Stock will go down	Buy a put
Stock won't go up much	Sell a call
Stock won't go down much	Sell a put

Key Terms You Must Know

Options have their own vocabulary. Learn these:

Essential Vocabulary

Term	Definition
Strike Price	The price at which you can buy/sell the underlying stock
Premium	The price you pay for the option contract
Expiration	The date the option expires (worthless if not exercised)
In the Money (ITM)	Option has intrinsic value (profitable to exercise now)
Out of the Money (OTM)	Option has no intrinsic value (would lose money to exercise)
At the Money (ATM)	Strike price equals current stock price
Intrinsic Value	Real value if exercised right now
Time Value	Extra premium for time remaining until expiration

The Greeks

Options prices are affected by several factors, measured by "Greeks":

Greek	What It Measures	Simple Translation
Delta	Sensitivity to stock price movement	How much the option moves per $1 stock move
Theta	Time decay	How much value you lose each day
Vega	Sensitivity to volatility	How much the option moves when volatility changes
Gamma	Rate of delta change	How fast delta changes as stock moves

Theta is the silent killer for option buyers. Every day that passes, your option loses value—even if the stock doesn't move. This "time decay" accelerates as expiration approaches.

Basic Strategies

Start with these before getting fancy:

1. Long Call (Bullish)

Buy a call option. You profit if the stock goes up significantly.

Max profit: Unlimited
Max loss: Premium paid
Best when: You expect a big upward move

2. Long Put (Bearish)

Buy a put option. You profit if the stock goes down significantly.

Max profit: Strike price - Premium (if stock goes to $0)
Max loss: Premium paid
Best when: You expect a big downward move or want portfolio insurance

3. Covered Call (Income)

Own 100 shares, sell a call against them. You collect premium but cap your upside.

Max profit: Premium + (Strike - Purchase price)
Max loss: Full stock downside minus premium collected
Best when: You're OK selling your shares at the strike price

4. Cash-Secured Put (Income/Buying)

Sell a put while holding enough cash to buy the shares if assigned. You collect premium and might get shares at a discount.

Max profit: Premium collected
Max loss: Strike price - Premium (if stock goes to $0)
Best when: You want to buy the stock anyway at a lower price

5. Protective Put (Insurance)

Own shares and buy a put to protect against downside. Like insurance for your portfolio.

Max profit: Unlimited upside minus put cost
Max loss: (Purchase price - Strike) + Premium
Best when: You're worried about a crash but don't want to sell

The Risks of Options

Options can blow up your account. Don't skip this section.

For Option Buyers

Total loss is common: Most options expire worthless. Your entire investment can go to zero.
Time works against you: Every day, time decay eats your premium.
Being right isn't enough: You need to be right about direction AND timing AND magnitude.

For Option Sellers

Unlimited loss potential: Selling naked calls can theoretically lose infinite money.
Assignment risk: You can be forced to buy/sell shares at inconvenient times.
Margin calls: Big moves against you can trigger margin requirements.

The Statistics

Fact	Reality
% of options that expire worthless	~60-70%
% of retail traders who lose money	~80%
Average holding period for winners	Weeks, not days

When Options Make Sense

Options aren't inherently good or bad. They're tools. Use them appropriately:

Good Uses of Options

Portfolio protection: Buying puts on your stock holdings before earnings or uncertain events.
Income generation: Selling covered calls on stocks you'd be willing to sell anyway.
Defined-risk speculation: Buying calls/puts when you have a strong view and want limited downside.
Buying at a discount: Selling puts on stocks you want to own at lower prices.

Bad Uses of Options

Gambling: Buying weekly out-of-the-money options hoping for a home run.
Leverage for the sake of leverage: If you wouldn't take the position without options, don't take it with options.
Selling naked options without understanding risk: This is how accounts blow up.
Trading around earnings: Volatility is priced in; it's harder than it looks.

Common Mistakes

I've seen (and made) these mistakes:

Mistake 1: Buying Too Short-Dated

Weekly options are cheap for a reason—they almost always lose. Give yourself time to be right. Buy at least 45-60 days out.

Mistake 2: Ignoring Time Decay

You bought a call, the stock went up 2%, and you lost money? That's theta. You need the stock to move MORE than the time decay is costing you.

Mistake 3: Position Sizing

Options are leveraged. A position that would be reasonable in stock might be crazy in options. Never put more than 1-2% of your portfolio in a single option trade.

Mistake 4: Holding Too Long

Options are decaying assets. If you have a profit, consider taking it. Don't get greedy waiting for the home run.

Mistake 5: Not Understanding Assignment

If you sell options, you can be assigned. Know what happens if you're assigned before you place the trade.

Getting Started

If you want to learn options, here's a practical path:

Step 1: Paper Trade First

Most brokers offer paper trading. Practice for at least 3 months before using real money. Track your would-be results honestly.

Step 2: Start with Covered Calls

If you already own 100 shares of something, sell a call against them. This is the lowest-risk way to learn option mechanics.

Step 3: Buy Long-Dated Options

When you're ready to buy options, start with 60-90 day expirations. Give yourself time to be right.

Step 4: Keep Position Sizes Small

Maximum 1-2% of portfolio per trade. Yes, this means smaller gains, but it also means you survive the learning curve.

Step 5: Learn from Losses

You will lose money on options. Everyone does. The question is whether you learn from it or blow up your account first.

Resources

Option pricing calculators (most brokers have them)
The Greeks displayed on your broker's platform
Implied volatility comparison tools
Start simple—avoid multi-leg strategies until you understand basic positions

Options are powerful tools that can enhance your investing—or destroy your account. Approach them with respect, start small, and never risk money you can't afford to lose.

This is not investment advice. Options trading involves substantial risk and is not appropriate for all investors. You can lose your entire investment. Do your own research and understand the risks before trading options.