What is an options contract?

An options contract gives you the right — but not the obligation — to buy or sell 100 shares of a stock at a fixed price (the strike price) before a specific expiration date. Call options give you the right to buy shares; put options give you the right to sell shares. Each standard options contract controls 100 shares. You pay a premium (the option price) to purchase this right. If the option expires worthless, you lose only the premium paid — not the entire value of the underlying shares.

What is the difference between a call and a put option?

A call option gives you the right to buy 100 shares at the strike price before expiration. You buy a call when you expect the stock to rise. A put option gives you the right to sell 100 shares at the strike price before expiration. You buy a put when you expect the stock to fall — or to hedge a position you already own. Example: Buy a call on Apple (AAPL) with a $200 strike price → if AAPL rises to $220, your call is in the money and you can buy 100 shares at $200 each, $20 below market price.

How much money do you need to start trading options?

Most brokers require you to be approved for options trading before you can place your first trade. Level 1 (buying calls and puts) typically requires a brokerage account with at least $2,000–$5,000 in assets. Selling options requires higher approval (Level 2 or higher) and usually $5,000–$25,000+ depending on the broker and strategy. Since each contract controls 100 shares, a $200 stock option might cost $500 in premium for one contract — so you can start with a few thousand dollars, but risk management requires adequate capital.

Are options riskier than stocks?

Buying options is considered higher risk than buying stocks because options can expire completely worthless. If you buy a call option for $500 and the stock doesn't reach the strike price before expiration, you lose the full $500 — that's a 100% loss on your premium. By contrast, a stock investment can lose value but rarely goes to zero. Selling (writing) options carries even greater risk — selling a naked call can expose you to theoretically unlimited losses if the stock rises dramatically. Options are complex instruments; the SEC and FINRA both advise retail investors to fully understand the risks before trading.

How are options taxed?

In the US, options gains are taxed as capital gains. If you hold an option for more than one year before selling or exercising, gains qualify for long-term capital gains rates (0%, 15%, or 20%). Most options traders hold for less than a year, so gains are taxed at ordinary income rates (up to 37%). Certain index options (SPX, VIX) are treated as Section 1256 contracts — taxed at a blended 60% long-term / 40% short-term rate regardless of holding period. Consult a tax advisor if you trade frequently.

How to Trade Options 2026 — Beginner's Guide to Options Trading

Options are contracts that give you the right — but not the obligation — to buy or sell 100 shares of a stock at a fixed price before a specific expiration date. Options trading can be used to speculate on price movements, hedge existing positions, or generate income — but options carry significant risk and can expire worthless. Here is how options trading works for beginners.

Quick answer: A call option profits when a stock rises; a put option profits when a stock falls. You pay a premium to buy the contract. If the stock doesn’t move in your expected direction by expiration, you lose the premium. Buying options is high-risk — start with small positions and paper trade (simulated trading) before using real money.

Options Basics — Key Terms

Term	Definition
Call option	Right to buy 100 shares at the strike price
Put option	Right to sell 100 shares at the strike price
Strike price	The fixed price at which you can buy/sell
Expiration date	Date by which you must act or the option expires
Premium	Price you pay to buy the options contract
In the money (ITM)	Call: stock above strike; Put: stock below strike
Out of the money (OTM)	Call: stock below strike; Put: stock above strike
At the money (ATM)	Stock price equals the strike price
Exercise	Using the right to buy or sell shares
Expiry	The option contract becomes worthless if not exercised

How a Call Option Works — Worked Example

Scenario: Apple (AAPL) is trading at $185. You believe it will rise to $210 within 3 months.

Buy 1 call option with a strike price of $190, expiring in 90 days
Premium (cost): $5 per share × 100 shares = $500 total cost

AAPL Price at Expiration	Your Outcome
Below $190	Option expires worthless. Lose $500 (100% of premium)
$195	In the money by $5. Gain $500 − $500 = $0 (break even)
$210	In the money by $20. Gain $2,000 − $500 = $1,500 profit
$220	In the money by $30. Gain $3,000 − $500 = $2,500 profit

Your maximum loss is always the premium paid ($500). Your potential profit is theoretically unlimited (the stock could keep rising).

How a Put Option Works — Worked Example

Scenario: Tesla (TSLA) trades at $250. You think it will fall.

Buy 1 put option with a strike price of $240, expiring in 60 days
Premium: $6 × 100 = $600 total cost

TSLA Price at Expiration	Your Outcome
Above $240	Option expires worthless. Lose $600
$234	Break even ($240 − $234 = $6 × 100 = $600 = cost)
$220	In the money by $20. Gain $2,000 − $600 = $1,400 profit

Step-by-Step: How to Start Trading Options

Step 1: Open a brokerage account approved for options

Options require broker approval. Apply for options trading (Level 1 minimum) at:

Tastytrade — built specifically for options traders; lowest commissions ($1/contract)
thinkorswim by TD Ameritrade (now Schwab) — best options analysis platform
IBKR — best for active traders; lowest margin rates
Fidelity / Schwab — solid for beginners with educational resources

Step 2: Get approved for options trading

Brokers will ask about your investment experience, net worth, and trading objectives. Most beginners are approved for Level 1 (buy calls/puts) or Level 2 (covered calls, cash-secured puts).

Options Level	Strategies Allowed
Level 1	Buy calls and puts
Level 2	Covered calls, cash-secured puts
Level 3	Spreads (bull/bear call/put spreads)
Level 4	Selling naked options (highest risk)

Step 3: Choose your underlying stock and expiration

Liquid options — stick to stocks and ETFs with high volume (Apple, SPY, QQQ, Nvidia) for tighter bid-ask spreads
Expiration — longer expirations (60–90 days) give the stock more time to move; shorter expirations are cheaper but expire faster
Strike price — at-the-money or slightly in-the-money options have more predictable behavior for beginners

Step 4: Understand your break-even price

$$\text{Call Break-Even} = \text{Strike Price} + \text{Premium Per Share}$$ $$\text{Put Break-Even} = \text{Strike Price} - \text{Premium Per Share}$$

Step 5: Place the order

Most brokers show an options chain — a grid of all available strike prices and expirations. Select your contract, enter the number of contracts (each = 100 shares), and place a limit order at or near the midpoint of the bid/ask spread.

Step 6: Monitor and manage

Options lose value over time as expiration approaches (time decay / theta). Most experienced options traders close their positions before expiration rather than exercising.

Common Beginner Options Strategies

Covered call: Own 100 shares of a stock, sell a call option on those shares to collect premium income. Limits your upside but generates income. Lower risk than buying options outright.

Cash-secured put: Sell a put option and keep enough cash to buy the shares if assigned. Income strategy — you collect premium; if stock falls to your strike price, you buy shares at a discount.

Bull call spread: Buy a lower strike call, sell a higher strike call on the same expiration. Limits max profit but also reduces premium cost. Better risk/reward than buying a naked call for beginners.

Protective put: Own shares and buy a put to limit downside — like insurance for your stock position.

Options Risk Warning

The SEC and FINRA both warn that most retail options traders lose money. Options can expire completely worthless. Selling naked options (without owning the underlying shares) can create theoretically unlimited losses. Start with paper trading (simulated trading) before using real money.

How Options Are Taxed (2026)

Scenario	Tax Treatment
Option bought and sold (profit) under 1 year	Short-term capital gains (ordinary income rates up to 37%)
Option bought and held 1+ year	Long-term capital gains (0%, 15%, or 20%)
Option expires worthless	Capital loss in the year it expires
Exercised call option	Cost basis of shares = strike price + premium paid
Section 1256 contracts (SPX, VIX index options)	60% long-term / 40% short-term regardless of holding period

Written by WealthVieu

WealthVieu researches and writes data-driven personal finance guides using primary sources including the IRS, Bureau of Labor Statistics, Federal Reserve, and Census Bureau.

The content on Wealthvieu is for informational purposes only and should not be considered financial, tax, or investment advice. Consult a qualified professional before making financial decisions. Full disclaimer · Editorial policy