Overview
This lecture introduces the basics of options trading for beginners, compares it with traditional stock investing, and details three practical options strategies with exam-ready definitions and step-by-step examples.
Basics of Stock vs. Options Trading
- Buying stocks gives you ownership that you can hold indefinitely, with limited action (buy/sell).
- Options trading involves contracts with expiration dates, creating time-limited opportunities.
- One options contract controls 100 shares of the underlying stock (leverage).
- Options provide more choices through strategic contract types beyond simple buy/sell.
Key Features of Options Contracts
- Expiration date: when the agreement ends and the option expires.
- Strike price: the pre-set price the stock can be bought or sold for in the contract.
- Premium: the cost paid by the buyer or received by the seller for the option contract.
Main Types of Options and Actions
- Call Option: right to buy at the strike price; bullish strategy.
- Put Option: right to sell at the strike price; bearish strategy.
- You can buy or sell calls and puts, leading to four main actions: buy call, sell call, buy put, sell put.
Three Key Options Strategies
1. Selling Covered Calls
- If you own at least 100 shares, you can sell call options and collect premiums.
- If the stock's price doesn’t reach the strike price by expiration, you keep your shares and the premium.
- If the stock reaches the strike price, you're obligated to sell your shares at that price.
2. Buying Stocks by Selling Puts
- Sell put options to potentially buy a stock below its current price while collecting premiums.
- If the stock stays above the strike price, you keep the premium and don't have to buy.
- If the stock drops to or below the strike price, you're obligated to buy at that price.
3. LEAPS (Long-term Equity Anticipation Securities)
- Buy long-term call options (LEAPS) to control 100 shares for less upfront money.
- LEAPS have expiration dates far in the future, reducing short-term risk.
- Your break-even price is the strike price plus the premium paid.
Key Terms & Definitions
- Option Contract — a legal agreement to buy or sell a stock at a specific price by a set date.
- Premium — the price paid or received for the option contract.
- Strike Price — the agreed-upon price in the contract to buy or sell the stock.
- Expiration Date — the date the option contract becomes invalid.
- Call Option — a contract giving the right to buy shares at the strike price.
- Put Option — a contract giving the right to sell shares at the strike price.
- Covered Call — selling a call option while owning the underlying shares.
- LEAPS — options with expiration dates longer than one year, used for long-term strategies.
Action Items / Next Steps
- Practice identifying expiration dates, strike prices, and premiums in live trading apps.
- Review the four basic options actions (buy/sell calls/puts) until confident.
- Try paper trading the three discussed strategies: covered calls, selling puts, and buying LEAPS.