• Options offer the potential to deliver higher returns

• Options offer a multitude of strategies to utilize (eg. strangles, straddles)

• Options are known to be less risky than equities

• Options allow you to trade high volumes with low capital giving you leveraging power

• Options give you OPTIONS on what you can do with stocks

Options may seem complicated at first, but after going through everything on this website and practicing using Robinhood or TDAmeritrades paper trading, you will be consistently seeing green days using options trading.

Options involve risks and are not suitable for everyone but with the right amount of experience, education, and tools, options can provide traders with a way to earn a piece of the stock market pie.

The formal definition of an option is a contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time frame.

In order to better understand what options are I'll give a rough example. Lets say in this hypothetical situation you and a friend are talking. Your friend is selling 100 shares of a stock and you are interested in buying a contract for the shares. The contract states that you can sell 100 shares at any given time in the next month. Your friend sells you a contract for $50 (premium) in which you can sell the 100 stocks at the determined price (strike point) in a month. Keep in mind you do not own 100 shares of the stock but rather a contract for 100 shares which is very different. If you do not sell the option by the end of the month (date of expiration), it expires and you lose all $50. You can exercise the right to sell the option at any time within the month. A week later, the price of the 100 stocks falls and now they are worth $4000. Now the contract is worth $60 because the contract was the right to sell at $5000 and is now worth more because you can sell the stock at a higher price than what it is currently trading for. When you exercise the put option, you sell the contract and you make a profit of $10. This is of course a rough example for put options but it gives you an idea of what will be talked about in this website.

A simple definition of an option is that it is a contract that allows buyers to buy or sell a security at a chosen price. When you buy an option contract you buy 100 shares at a reduced price and every cent the underlying stock moves, the price of your contract moves as well.

Options are divided into "calls" and "puts."

A put option is where the buyer has the right to sell the underlying stock in the future at a predetermined price (strike price). A buyer would want to purchase a put option when they believe that the price of the stock is going to go down in the future and they would earn a profit when they sell the option at the predetermined price because the price of the underlying stock has dropped.

A call option is where the buyer has the right to buy the stock in the future at a strike price. A buyer would want to purchase a call option when they believe that the price of a stock is going to go up in the future.

The strategy we will be using mainly focuses on BUYING PUT options. Again put options is the option to sell the underlying stock at a predetermined strike price until a fixed expiry date. The buyer of the put has the right to sell shares at the strike price and if the buyer decides to sell, the put writer/seller is obliged to buy at that price.

Options give buyers leverage and allow buyers to purchase 100 stocks with a cheap contract. For every cent your option contract goes up or down, that amount times 100 is the amount you are losing or gaining which shows how profitable options can be with the right amount of knowledge and also how risky options can be if you are not sure what you are doing.

You buy an option contract at a certain strike price typically for put options you buy at a strike price rounded up. For example, if the price of an underlying stock is $9.07, then you would buy a put at a strike point rounded up which could be $9.50 or even $10.00. Buying puts at this strike price allows your contract to be in the money.

Buyers will also choose when their contract will expire. As an options contract approaches its date of expiry, time decay will begin eating away at the contracts worth. Choosing the right expiration date is an ability option traders must master and giving their stock price enough time to move the direction they are betting on is vital.

The main factor that affects the price of options contracts is, of course, the price of the underlying stock. When you buy a put option and the price of the underlying stock drops, then that put contract will be worth more. Conversely, when you buy a call option and the price of the stock goes up, then the price of that call contract will be worth more.

There are more factors that affect the price of an option contract than just the underlying stock price.

Choosing when your contract expires is important in options trading. You want to give the underlying stock enough time to move the way you are speculating but not too much time as the contracts that expire at a later date become much more expensive. Which makes sense because when you give your donwtrending underlying stock 2 months to drop to the price where you are making a profit it has a higher chance to get to that point than a contract that expires in a week. The contracts I buy usually expire the same week if I am buying it on a Monday, Tuesday or sometimes Wednesday and contracts I buy on Thursday expire the week after. I don't buy any options contracts on Fridays as what can happen to an underlying stock through the weekend is unpredictable and the risk is not worth the return.

Swing trading your options contracts is the best way to get the best returns. Most of the big returns for me have been from day trading the options contract or holding it until the next day before selling the contract.

It is important to sell your contract at least a day before the date of expiry as filling your order on the date of expiry is rare and your option contract could expire and be worth nothing.

Volatility is a factor that many beginning traders do not consider when they're first trading options. Volatility describes the speed and amount of price changes. Higher volatility means the price of the stock experiences large fluctuations very frequently while low volatility means the price of the stock is steady and doesn't tend to fluctuate. Volatility for a stock might increase when there is an upcoming earnings call or a big announcement for a company.

Volatility increases the price of both put and call options as there is a bigger chance of movement within the underlying stock price. It makes sense that a stock with low volatility will have cheaper contracts as the stock price exhibits steady behavior and will not likely move up or down significantly.

It is important to take volatility into consideration before buying a contract and we will get into what the right volatility to buy into is in the page "When to Buy and Sell."

It is important as an options trader to understand the "Greeks" which provide information about how every option contract price moves as these different factors change. The greek prefixes are Δ Delta, ν Vega, Γ Gamma, and Θ Theta.

Delta is the more popular options Greek as it measures the option contract's price sensitivity relative to changes in the underlying stock. Options traders will want to pay attention to Delta as it provides one with an indication of how the option contract's value will change in response to price fluctuations in the underlying stock.

Vega measures the contract's sensitivity to changes in the volatility of the underlying stock and represents the amount that the option contract's price changes when there is a 1% change in the stock's volatility. Traders will want to pay attention to Vega as implied volatility can greatly affect the price of contracts and Vega will give traders an understanding of how much volatility could change the price.

Gamma is not too important compared to Delta and Vega as it measures the sensitivity of Delta in response to price changes in the underlying stock. Gamma shows how Delta will change when there is a one-point price change in the stock. Delta values tend to change at different rates so Gamma is useful in measuring/analyzing Delta. Traders might want to pay attention to Gamma to determine how stable an option's Delta is as higher Gamma values indicate that Delta could change dramatically in response to even a small price change in the underlying stock.

Theta measures the time decay of an option or rather the dollar amount that an option loses every day as time passes assuming all other variables/Greeks remain constant. When planning a long term options contract, traders will want to pay attention to theta as time decay can eat up a large portion of any profits made.