How to Trade Options

Here are the basic steps involved in the options trading process.

1. Determine your objective.

  • Income generation

    Options can be used to potentially generate income on stocks you own and stocks you would like to own.

  • Hedging

    Options can be used to reduce the risk on an existing stock position.

  • Speculation

    Options allow you to take a speculative market position using leverage. You can even create a position that potentially profits if the market stays neutral.

Regardless of your trading objective, you'll need a brokerage account that's approved to trade options in order to proceed with any strategy involving options. The types of options trades you can place also depend on your specific options approval level. Talk to a Schwab specialist at 888-245-6864 to learn more.

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 , implied volatility Tooltip , sector, or other parameters can narrow the universe of trades down to a manageable set of ideas.

Schwab has tools to help you find potential options trade ideas:

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  • Idea Hub™

    Screenshot of Idea Hub tool

    Idea Hub provides you with specific options trade ideas based on whether you're bullish, bearish, or neutral.

  • Options screeners

    Screenshot of options screeners

    Predefined and customizable options screeners can help you browse and choose criteria to find trade opportunities that fit your needs.

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  and expiration dates Tooltip , and implied volatility Tooltip

Schwab's Trade and Probability Calculator provides a visual way to evaluate an option's potential profit and loss scenarios.

Screenshot of Trade & Probability Calculator Screenshot of Trade & Probability Calculator Screenshot of Trade & Probability Calculator

4. Place your options trade.

Settled on a specific option to 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 (type, expiration, strike price, number of contracts, etc.). Once your order is submitted, it will be routed to the market to be matched with another trader's order to sell or buy your contract.

Screenshot of All-in-One Trade Ticket Screenshot of All-in-One Trade Ticket Screenshot of All-in-One Trade Ticket

5. Manage your position.

Once your options position has been established (opened), it's wise to keep an eye on its value and trend to help know what to do as it approaches expiration.  

If you bought an option, depending on what the underlying price is, you may decide to sell the option before it expires, exercise the option and buy or sell the underlying security, or allow the option to expire worthless.

If you sold an option, you can choose to buy the option back (to close the position) or allow the option to expire worthless. You could also be required to take assignment by buying or selling the underlying security. 

Schwab's options charts feature studies to monitor an option's volatility and trend over time. You can even close existing positions directly from the chart. And our options specialists are ready to answer questions or help close your position.

Why trade options with Schwab?

  • $0.65 option contracts¹

    Online options trades at Schwab have no base commission and low per contract fees.

  • Intuitive platforms

    Plan and execute strategies on the convenience of web, mobile, or advanced software. 

  • Options specialists

    Get real-time trade analysis and focused support from options professionals during trading hours.

  • Schwab's perspective

    Each trading day, review Today's Options Market Update from Schwab.

  • Open an account today

    No account fees or minimums.

    Already a client? Log in to apply for options approval.

Have questions about options? We're here to help.