Understanding options

Learn about the basic components of the two types of options contracts—calls and puts—and why you would want to consider incorporating them into your trade plan.

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What is an option?

An option is a contract that gives you the right to buy or sell a financial product at an agreed upon price for a specific period of time. 

Options are available on numerous financial products, including equities, indices, and ETFs. Options are called "derivatives" because the value of the option is "derived" from the underlying asset. 

When you trade stock, you exchange ownership in a company. By contrast, when you buy or sell option contracts, you are trading the potential, or obligation, to buy or sell the underlying stock. Owning an option, in and of itself, does not impart ownership in the underlying security, nor does it entitle the holder to any dividend payments.

Want to see how options can be similar to coupons or insurance policies? Then check out our "What is an Option?" infographic.

Why trade options?

If you only trade equities, your primary trading strategies are limited to buying the stock if you are bullish or shorting the stock if you are bearish. 

By incorporating options into your strategy, you'll get more ways to trade whether you’re bullish, bearish, or even neutral on the market. They include the potential to:

  • Lock in the price of a stock for a specified time period without having to commit to buying the stock.
  • Buy a stock in the future at a discount to its current price.
  • Protect a stock in your portfolio from a substantial price decline.
  • Generate income on existing stocks in your portfolio.

It is important to understand that there are risks, costs, and trade-offs along with the potential benefits offered by any option strategy. Be sure you fully understand these aspects before entering into any option strategy.

In order to trade options, you'll also need a brokerage account that's approved for options trading. The types of options trades you can place also depend on your specific options approval level, which is based on a number of suitability factors that can vary from broker to broker.

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Calls vs. Puts

Calls
A Call option gives the contract owner/holder (the buyer of the Call option) the right to buy the underlying stock at a specified price by the expiration date Tooltip . Calls are typically purchased when you expect that the price of the underlying stock may go up.

Puts
A Put option gives the contract owner/holder (the buyer of the Put option) the right to sell the underlying stock at a specified price by the expiration date. Puts are typically bought when you expect that the price of the underlying stock may go down.

 

Learn how to make an options trade
Chart of Calls vs. Puts Chart of Calls vs. Puts Chart of Calls vs. Puts

Common options strategies

Typically, options traders choose a strategy based on their outlook.

  • Objective 
  • Outlook
  • Strategy
  • Description
  • Objective 

    Income generation 
  • Outlook

    Neutral to bullish 
  • Strategy

    Covered Call 
  • Description

    Sell a call against an existing stock position 
  • Objective 

    Income generation 
  • Outlook

    Neutral to bullish 
  • Strategy

    Cash-Secured Equity Put
  • Description

    Sell a put, secured by cash set aside in case of assignment
  • Objective 

    Hedging  
  • Outlook

    Neutral to bearish
  • Strategy

    Protective Put
  • Description

    Buy a put on an existing stock position
  • Objective 

    Speculation  
  • Outlook

    Either direction 
  • Strategy

    Straddle
  • Description

    Buy a call and a put at the same strike 
  • Objective 

    Speculation  
  • Outlook

    Either direction 
  • Strategy

    Debit Spread
  • Description

    Buy and sell a call at the same time, or buy and sell a put at the same time 

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.