An option is a contract that gives the buyer the right, but not the obligation, to buy ("call") or sell ("put") a stock's index or future at a specific ("strike") price before a specified date in time ("expiry date"). Like a stock, an option is a security, meaning that it is a right to ownership of something else. However, unlike a stock, an option is a derivative, meaning that it derives its value from something else (usually a stock or stock index).The terms in parentheses are specific to options trading, and comprise a small part of the total number of terms in this unique language.;
, Options are a contract that confers the right to buy or sell something else to the buyer. The buyer (that's you) pays for this right and, hopefully, makes more off of the deal than you paid for the option. In other words, by buying the option you are not buying the underlying asset, but the right to buy or sell that asset at a given price.This concept can be complicated, but makes more sense when applied to everyday objects. For example, imagine that you find a used car that you want to purchase, but don't have the money for yet. You offer the salesman $1,000 for a contract that gives you the right to buy that car for $20,000 in two months (remember, this is a theoretical example). He agrees and you now have a "call" option on the car.
At the end of that two months, you can either buy the car for the contract amount ($20,000) or decide not to buy the car and lose your $1,000.
Over the two months, the value of the asset being bought (the car) can also change. Imagine, for example, one case in which the car is discovered to be a prop from a famous movie. The value shoots up to $100,000. The salesman is now forced to sell you the car for $20,000, netting you an $80,000 profit, minus the $1000 contract cost, for a total of $79,000.
However, the value can also go down. Imagine over the course of the two months, a mechanic inspecting the car discovers massive structural damage. The value drops to $10,000. If you choose to still buy the car, you will lose $11,000 (including the contract value of $1,000) on the purchase. However, you are not obligated to purchase the car with an option.
 "Put" and "call" options are the two main types of options available to investors.


When you purchase a call, you are guaranteeing that you can buy a specific number of shares (usually 100 shares per contract) of the underlying security at a certain price by a certain date.A put guarantees you can sell a specific number of shares (again, usually 100) of the underlying security at a certain price by a certain date., Options offer flexibility, diversification, and a certain amount of protection against loss, and all for a fairly inexpensive cost.For instance, if stocks for a particular company are selling for $100 per share, you could buy 100 shares for $10,000. However, the option for that same company might be at eight points, and stocks are generally traded in blocks of 100, meaning the same amount of stock would cost you only $800!,, Options are available from almost all online brokerages and from brokers at large financial institutions. The best place to get started is with whoever handles your other investments. There are various types of specialized options trading software, but these platforms are often scams or just ineffective. Treat options as you would any other investment and handle them through your regular broker., Ask your broker or look around your online brokerage for a security, like a stock or exchange traded fund (ETF), that you want to buy an option on. Look at the asset's historical performance and then consider where it might be headed in the future. Do you think the price will increase or decrease? Study the security and make a prediction.
 Check on your trading platform for options derived from your chosen security. These options will have strike prices either above the current price ("out of the money" for call options and "in the money" for put options) of the security, below it ("in the money" for call options and "out of the money" for put options), or at the same value ("at the money" for both call and put options).For example, an investor buys a call option to buy a security at a $40 strike price. If the security is currently trading at $45, the call option is in the money by $5.
 The cost of an options contract, in other words the right to the option, is called the premium. This premium is charged by the seller of the option even if the buyer decides not to use the option. The premium is listed per share, while options contract are generally for 100 shares. For example, a premium might be listed as $0.25, but this would cost $25.00 (0.25*100) for the entire contract of 100 shares.


Premium prices fluctuate and are a based on a number of factors, including volatility, security price, and time value., Remember which way you think your security's price will move. Buy the appropriate option at the right strike price and time for you to make a profit. For example, imagine that you think that a security currently trading at $40 will be trading for $60 in three months. You see an option priced with a strike price at $45 in three months and a premium of $0.50. Obviously, if your stock performs even close to as well as you expect, you will see a sizable profit when you exercise the option.


If you purchased this option, you would pay a premium of $50 (100 shares *$0.50 per share).
 Track the price of the security after you purchase an option on it. Look for signs that it may or may not move as expected. This doesn't mean that you should panic if it dips one day when you expect it to go up, but that if it begins to trend downward over several weeks or months you should reconsider your position.
 You have three options when it comes to using your option. You can trade before maturity, trade at maturity, or decide not to use your option. Your choice will depend on the market price of the underlying security. These choices make sense in the following situations using the example option:The security, which was trading at $40 when you bought the option, has hovered around $40 in the two month since. You have another month left on your option, but don't think that the price will improve much in that time. You decide to trade before maturity and exercise the option on an up day at $42. This means that your profit is $2 per share (or $200) minus the $50 premium and any fees charged by your broker.
The security builds value steadily over the three months, arriving at $55 near the end of the contract term. You decide to trade at maturity by exercising your option just before maturity at the $55 dollar market price. This gives you $10 in profit per share (or $1000) minus the $50 premium and any broker fees.
Unforeseen circumstances pull the stock price down to $25 within the first month, where it remains through the end of the three months. You wisely decide not to exercise your option. This costs you your premium of $50.
 Many people prefer to use index ETFs such as SPY or QQQ, since they are less volatile and will be more consistent.
 This can be based off of informational analysis, like using charts and graphs provided by your broker, or on your analysis of market events (company profit reports, investor confidence, world events). If you are using graphical analysis, draw your support or resistance lines using your charting software. Use indicators (MACD, RSI, Stochastic, etc) to determine stock direction. In this example, the stock is headed lower due to a crossing in stochastics and a double top pattern.
 A bear call spread will be placed above resistance. A bull put spread will be placed below support. The goal of the spread is for the stock to stay neutral or bearish (decreasing) when placing a bear call spread (BCS) or for the stock to stay neutral or bullish (increasing) when placing a bull put spread (BPS).


A spread above the current price is called a bear call spread (BCS for short). A spread below the price is called a bull put spread (BPS).
 This should be above resistance for a BCS or below support for a BPS. In the above example, placing a BCS at $135/136 is perfect. If your stock has dollar options, it's advised to place more contracts with a smaller spread (10 contracts at $135 / 136) vs. buying fewer contracts with a larger spread (5 contracts at $135 / 137).
 As a rule of thumb, your risk is your spread difference ($136-135) multiplied by 100. Then subtract your profit. For example, if you receive $30 for a $135/136 BCS, your risk is $100-30 = $70, and your ROI would be $30/$70 = 42%. Make sure your profit is enough to justify the risk. Additionally you can use probability calculators to see break-even points and danger zones. Stick with a certain probability of success, and don't break that just to get a better profit.
 For example, for a BCS, sell the $135 call and buy the $136 call. For a BPS, sell a $120 put and buy the $119 put.
 Follow the trade every day to see if the stock is going against you. If it stays still or goes in the desired direction, you have nothing to do: just let it expire. If it goes against you, you can buy back the sold option at a loss and let the bought option gain value, possibly breaking even or even making a small profit. Also feel free to close out the trade at any time if you've made a profit and want to keep it.
Understand what an option is.
Learn how options work.
Learn the difference between puts and calls.
Compare the benefits of buying options rather than buying stocks.
Even if you lose money, you cannot lose more than the the premium, or price of the option.On the other hand, your potential for profit has no limit.
Find a broker if you don't already have one.
Find a security to buy an option for.
Look at available option prices for your chosen security.
Calculate the cost of the premium.
Purchase the right option.
Follow the price of the underlying security.
Decide what to do next.
Determine what security you want to trade, and predict which direction its price will move.
Find support for prediction.
Choose either a bear call spread or a bull put spread.
Determine the price at which to set your spread.
Calculate your profit/loss potential by using your brokerage's tools or by hand.
Place the spread by selling the option that's closer to the stock price and buying the next closest.
Set your stop-losses above the resistance or below the support.
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